Calling The Bottom

I have been an open book on these boards. Makes me wonder who the weasel is...

I prefer the term "enigmatic."

I would derive neither personal satisfaction nor financial benefit by posting my pedigree for all the virtual world to see.


.

FG,
Can you post a few examples?

Sterling Reef: A new gulf front building. 2/2 with 1076 sq ft just sold for $245,000.

I have a spread sheet that runs the cash flow that I used when analyzing condos. Using a 30 yr 6% with 20% down, my tax bracket, depreciation, condo dues, taxes, estimate on utilities, and insurance.

It should be break even on actual cash flow with about $20,000 per year in rental income.

With break even cash flow you actually have a positive investment return from the principle you build. But of course there is opportunity cost from the down payment.

This does not take into account unforeseen assessments. And with descent insurance you will be well protected from loss of income due to a hurricane.

Anyway, not to get too deep. The numbers are not exact and will be different depending on one's situation. I don't want to debate the details other than I think it could come very close to cash flowing.

As I stated in another post, as a pure investment you can probably do better than this. But if you are an end user you would have a gulf front condo to enjoy for part of the year, and that has to be worth something.


JMHO,
Flyguy

Sterling Reef: A new gulf front building. 2/2 with 1076 sq ft just sold for $245,000.

I have a spread sheet that runs the cash flow that I used when analyzing condos. Using a 30 yr 6% with 20% down, my tax bracket, depreciation, condo dues, taxes, estimate on utilities, and insurance.

It should be break even on actual cash flow with about $20,000 per year in rental income.

With break even cash flow you actually have a positive investment return from the principle you build. But of course there is opportunity cost from the down payment.

This does not take into account unforeseen assessments. And with descent insurance you will be well protected from loss of income due to a hurricane.

Anyway, not to get to deep. The numbers are not exact and will be different depending on one's situation. I don't want to debate the details other than I think it could come very close to cash flowing.

As I stated in another post, as a pure investment you can probably do better than this. But if you are an end user you would have a gulf front condo to enjoy for part of the year, and that has to be worth something.


JMHO,
Flyguy

Thanks for taking the time to post the info.

I'll not debate the details, but I'll just go on record by saying IMO (and based on many of the details you yourself pointed out) I wouldn't consider this as a decent RE 'investment.'

<I just checked out this condo @ Property Appraiser's site>

Place opened in 2005.

It currently shows only 2 units 'sold' in 2008.

(1) Unit 604B bought for 275K from the bank. Originally purchased for 615K in 2005

(2) Unit 1506B 'bought' by JP Morgan Chase (foreclosure). Last purchased for 615K in 2006

Most of the condo-owers are holding these units at 2005 prices averaging $500k+ (most all are non-homesteaders paying mucho taxes).

This place is a trainwreck in progress.


.

Oh boy, I always hesitate making detailed posts becasue you then have to defend the numbers.

Anyway, the tax records are not up to date with the latest sales. 104 and 402 sold in the last month for $244,900 and $250,000 respectively. There is also at least one 3 bedroom that sold for much higher.

It is without a doubt a trainwreck. They are selling at less than 40 cents on the dollar from the peak. (WWWBD)

Flyguy

Thanks for taking the time to post the info.

I'll not debate the details, but I'll just go on record by saying IMO (and based on many of the details you yourself pointed out) I wouldn't consider this as a decent RE 'investment.'

<I just checked out this condo @ Property Appraiser's site>

Place opened in 2005.

It currently shows only 2 units 'sold' in 2008.

(1) Unit 604B bought for 275K from the bank. Originally purchased for 615K in 2005

(2) Unit 1506B 'bought' by JP Morgan Chase (foreclosure). Last purchased for 615K in 2006

Most of the condo-owers are holding these units at 2005 prices averaging $500k+ (most all are non-homesteaders paying mucho taxes).

This place is a trainwreck in progress.

Sterling Reef: A new gulf front building. 2/2 with 1076 sq ft just sold for $245,000.

I have a spread sheet that runs the cash flow that I used when analyzing condos. Using a 30 yr 6% with 20% down, my tax bracket, depreciation, condo dues, taxes, estimate on utilities, and insurance.

It should be break even on actual cash flow with about $20,000 per year in rental income.

With break even cash flow you actually have a positive investment return from the principle you build. But of course there is opportunity cost from the down payment.

This does not take into account unforeseen assessments. And with descent insurance you will be well protected from loss of income due to a hurricane.

Anyway, not to get too deep. The numbers are not exact and will be different depending on one's situation. I don't want to debate the details other than I think it could come very close to cash flowing.

As I stated in another post, as a pure investment you can probably do better than this. But if you are an end user you would have a gulf front condo to enjoy for part of the year, and that has to be worth something.


JMHO,
Flyguy

Hey Flyguy,

Curious, what appreciation rate did you account for or did you leave that out, and do you have any idea what your IRR would be over say 10 years? I'm curious how it compares to other investments. Also, taking into account down time from storms and the like, is 20K a year reasonable? Is that managed, rent by owner?

Hey Flyguy,
Curious, what appreciation rate did you account for or did you leave that out, and do you have any idea what your IRR would be over say 10 years? I'm curious how it compares to other investments. Also, taking into account down time from storms and the like, is 20K a year reasonable? Is that managed, rent by owner?

Again don't take all this as hard numbers. It is the return on the first years ownership with zero appreciation. I did not take it to out years. I insured my own condo for loss of use and extra assessments due to hurricanes. Based on my insurance, you would probably make more money from the insurance for loss of use than you would from rentals. The $20,000 is net rental income so you better add 30% more if you want to use rental management. I think $20,000 is doable by owner for a 2/2 but you would have to decide for yourself.

To compare it to other investments I think you have to put a dollar amount on the value of you having your own condo and that is hard to quantify.

As far as appreciation I assumed zero. I have my opinion but what do others think a 2 bedroom gulf front condo will be going for in 10 years? (WWWBD)

JMHO
Flyguy

As far as appreciation I assumed zero. I have my opinion but what do others think a 2 bedroom gulf front condo will be going for in 10 years? (WWWBD)

JMHO
Flyguy

I think if one buys at these current prices and subtracts carrying costs (and considering the "ownership aggravation" will cancel out "ownership joy"), in 10 years I think the condo will return somewhere between "in-the-hole" to "lucky to be breaking-even."

.

I would be curious to see what actual rental income is post-season. How many units have come online over the past 2-3 years? There are so many more units available from Destin to PCB, won't it be difficult to gauge rental potential pre-season?

I think if one buys at these current prices and subtracts carrying costs (and considering the "ownership aggravation" will cancel out "ownership joy"), in 10 years I think the condo will return somewhere between "in-the-hole" to "lucky to be breaking-even."
.

Your opinion is as valid as any one else's. I would put the number conservatively at $350,000-400,000 (gotta love those babyboomers). I hope others will give their estimate on what they think it will be worth.

I assume you don't own anything beachfront (please correct me if I am wrong). So from someone who has always wanted a place on the beach, I really don't think you have a very good handle on the value of ownership joy.

JMHO,
Flyguy

I would be curious to see what actual rental income is post-season. How many units have come online over the past 2-3 years? There are so many more units available from Destin to PCB, won't it be difficult to gauge rental potential pre-season?

.
Difficult?..no. More along the lines of impossible.

.

I would be curious to see what actual rental income is post-season. How many units have come online over the past 2-3 years? There are so many more units available from Destin to PCB, won't it be difficult to gauge rental potential pre-season?

Difficult?..no. More along the lines of impossible.

I disagree with Shelly. There are lots of folks who have booked their beach homes/condos up for the coming season. I would think they have a very good handle on what they will gross/net. You just need to find owners that rent their units in the building you are looking at.

For example, our last trip to the beach for the summer is next week. We don't plan to use our condo during the high season (too much heat and too many people). So my wife got a VRBO site and rented out our place for all of June and July and into August. It booked up quickly. I think we have a pretty good handle on what we will get as she has already gotten non refundable deposits from most of our guests.

We won't be renting in the fall because that is what I consider high season. No crowds, nice temps, and the water is still warm.

Flyguy

We won't be renting in the fall because that is what I consider high season. No crowds, nice temps, and the water is still warm.

I'm with you on that. Fall is by far my favorite season.

Your opinion is as valid as any one else's. I would put the number conservatively at $350,000-400,000 (gotta love those babyboomers). I hope others will give their estimate on what they think it will be worth.

I assume you don't own anything beachfront (please correct me if I am wrong). So from someone who has always wanted a place on the beach, I really don't think you have a very good handle on the value of ownership joy.

JMHO,
Flyguy

Ok, first a caveat, I'm no expert on this but I did stay at a Holiday Inn Express last night...

Assume there's no buffer in the beginning where you lose value. Your original sale price of a unit today was 245,000.00, so appreciation is -

3% annual over 10 years - 329K
4% - 362K
5% - 399K
6% - 438K

(Personally I go with conservative appreciation numbers and assume a 2 year buffer where it actually depreciates a bit to protect myself and to establish a bottom.)

On the investment, you said 20K in cash flow breaks you even, so I assume your annual carry costs are equal to 20K. If 20K is all you expect to make on average, with appreciation like the above in most cases you will lose money on it.

using -

25% capital gains rate
28% top marginal tax rate
sale commission of 4%
10 year fixed @ 6%
20% down
20K / year income with 3% annual increase
20K / year cost with 3% annual increase

you get -

appreciation - annual return
3% - 1.36%
4% - 2.76%
5% - 4.11%
6% - 5.48%

With anything but the most optimistic appreciation, your return is less than inflation. Also, note that with appreciation of 6% your return is 5.48% - it will cost you money over the 10 years to carry it. That's important. You would not make money until you sold, or you would have to increase your annual revenue somehow, by a good chunk of change, or cut the 20K in costs.

Also I'd add that if your base carry is 20K, your actual carry will be higher because you will have to replace things, repaint, fix / replace broken appliances, etc.. assuming you haven't taken that into account. (I've heard horror stories about trashed condos from quite a few folks around here.)

Assume a carry of say 22K @ 3% appreciation, your return drops into the negative, you loose money overall. Very thin margins!

Of course, there are so many "what ifs" like what if I make more than 20K a year, or what if a hurricane hits and I lose a season, or what if it appreciates at 20% ...

Hope I've helped. I don't want you to think I'm trying to sh*t on your parade or anything, I just dig run run running numbers and like to help out if I can.

I'd also add, one sure fire way to imrpove your numbers, wait for the bottom, and buy at 50K-75K less. If it never gets there, who cares? Without it you'd probably make more money investing in a government bond or CD.

Ok, first a caveat, I'm no expert on this but I did stay at a Holiday Inn Express last night...

Assume there's no buffer in the beginning where you lose value. Your original sale price of a unit today was 245,000.00, so appreciation is -

3% annual over 10 years - 329K
4% - 362K
5% - 399K
6% - 438K

(Personally I go with conservative appreciation numbers and assume a 2 year buffer where it actually depreciates a bit to protect myself and to establish a bottom.)

On the investment, you said 20K in cash flow breaks you even, so I assume your annual carry costs are equal to 20K. If 20K is all you expect to make on average, with appreciation like the above in most cases you will lose money on it.

using -

25% capital gains rate
28% top marginal tax rate
sale commission of 4%
10 year fixed @ 6%
20% down
20K / year income with 3% annual increase
20K / year cost with 3% annual increase

you get -

appreciation - annual return
3% - 1.36%
4% - 2.76%
5% - 4.11%
6% - 5.48%

With anything but the most optimistic appreciation, your return is less than inflation. Also, note that with appreciation of 6% your return is 5.48% - it will cost you money over the 10 years to carry it. That's important. You would not make money until you sold, or you would have to increase your annual revenue somehow, by a good chunk of change, or cut the 20K in costs.

Also I'd add that if your base carry is 20K, your actual carry will be higher because you will have to replace things, repaint, fix / replace broken appliances, etc.. assuming you haven't taken that into account. (I've heard horror stories about trashed condos from quite a few folks around here.)

Assume a carry of say 22K @ 3% appreciation, your return drops into the negative, you loose money overall. Very thin margins!

Of course, there are so many "what ifs" like what if I make more than 20K a year, or what if a hurricane hits and I lose a season, or what if it appreciates at 20% ...

Hope I've helped. I don't want you to think I'm trying to sh*t on your parade or anything, I just dig run run running numbers and like to help out if I can.

What caused you to pick a 10 year note? Did I miss something that Flyguy posted about that in his scenario?
Cutting through much of the above: a %20 down payment of $245,000 is $49,000. In the propsed scenario $20,000 collected annually pays the mortgage/int/taxes, breakage etc.-All costs associated with owning. Let's disregard rent increases or decreases and consider it breakeven throughout Flyguy's ownership. If at the end of 10 years we use your 3% appreciation and have a sales price of $329,000, less your commision rate, we end up having turned $49,000 into $120,000. Using my nugget and the rule of 72 that seems to be a pretax return of a bit more than 9% annually over the course of 10 years. Significantly higher if the appreciation rate is upped.

What caused you to pick a 10 year note? Did I miss something that Flyguy posted about that in his scenario?
Cutting through much of the above: a %20 down payment of $245,000 is $49,000. In the propsed scenario $20,000 collected annually pays the mortgage/int/taxes, breakage etc.-All costs associated with owning. Let's disregard rent increases or decreases and consider it breakeven throughout Flyguy's ownership. If at the end of 10 years we use your 3% appreciation and have a sales price of $329,000, less your commision rate, we end up having turned $49,000 into $120,000. Using my nugget and the rule of 72 that seems to be a pretax return of a bit more than 9% annually over the course of 10 years. Significantly higher if the appreciation rate is upped.

30A's calculation makes more sense than yours in this situation. Your calculation assumes the only amount at risk is the initial down payment. In actuality, the entire purchase price of $245k is at risk--the lender has full recourse against the borrower for the amount of the mortgage. If the value of the condo sinks to $150k, the borrower has lost not only the equity investment but also part of the borrowed capital.

Therefore, the return calculation should be based on the total capital invested--not just the equity investment. The return on equity calculation works in a situation where there is no recourse to the borrower for the borrowed capital.

30A's calculation makes more sense than yours in this situation. Your calculation assumes the only amount at risk is the initial down payment. In actuality, the entire purchase price of $245k is at risk--the lender has full recourse against the borrower for the amount of the mortgage. If the value of the condo sinks to $150k, the borrower has lost not only the equity investment but also part of the borrowed capital.

Therefore, the return calculation should be based on the total capital invested--not just the equity investment. The return on equity calculation works in a situation where there is no recourse to the borrower for the borrowed capital.

A stock's value can fall to zero, a shorted stock can rise forever, a bond can be defauted on etc.. The full recourse you mention would be the equivalent of a big margin call, no? If you want to calculate without leverage then please do so but that isn't what was demonstrated.

Only the buyer could honestly answer the question, "Is now a great time to buy?" They should know if they can comfortably afford the property; they should know what contingencies they've got in place if the market or their finances turn; they should know if they love the area; they should know if they like the property and location. If they don't know--then "now," or any time, is not a good time to buy.

The buyer should also clearly understand that Realtors have no fiduciary responsibility toward their clients and that with Realtors, as with all commissioned salespeople, "now" is always a great time to buy.

Until RE brokers are required to have Series 7 licenses, "now" will always be a great time buy.

.

Shelly, I give you partial thanks on this post, and partial . You make very good points in your first paragraph. If one looks only at the recent history of the market, it is a good time to buy, but a buyer cannot be that narrowly focused and must also have a income to support a purchase, a need or want for the property, etc. I think that Realtors forget to mention those things because those things seem so basic and known by the buyer, but it is good to see it mentioned. Any purchase of any sort, is always relative to the buyer's perspective.

I see that one other person called you on the fiduciary responsibilities of Realtors, which any Realtor can have by acting as a Single-Agent. However, before everyone goes out asking their Realtor to act as a Single Agent, they should be aware of the limitations which also come with a Single Agent. For example, a Single Agent cannot show any listings of their entire company (there is one exception to that rule, but I don't wish to confuse people even more). One other huge concern to a buyer/seller who has a Realtor working as a Single Agent is that the buyer/seller may be legally liable for the Realtor's actions . Acting as a Transaction Broker takes away that fiduciary duty, but opens up all the properties listed for sale, eliminates that buyers'/sellers' liability of the Realtor's actions, but also limits advice given by the Realtor.

One last note is that not all Realtors are equal. There are good Realtors and bad Realtors, just as there are good CEOs and bad CEOs. The Realtors Code of Ethics states that a Realtor cannot place the interests of the Realtor before the interests of the customer. If you know of a Realtor doing that, report them immediately and they will swiftly be dealt with. Those people hurt the reputation of us who are professional and adhere to the Realtors' Code of Ethics. I know many very trustworthy Realtors in this area, and many of them post here on SoWal.com. I also know a few apples which are beginning to turn brown. As I said, not all are equal.

What caused you to pick a 10 year note? Did I miss something that Flyguy posted about that in his scenario?
Cutting through much of the above: a %20 down payment of $245,000 is $49,000. In the propsed scenario $20,000 collected annually pays the mortgage/int/taxes, breakage etc.-All costs associated with owning. Let's disregard rent increases or decreases and consider it breakeven throughout Flyguy's ownership. If at the end of 10 years we use your 3% appreciation and have a sales price of $329,000, less your commision rate, we end up having turned $49,000 into $120,000. Using my nugget and the rule of 72 that seems to be a pretax return of a bit more than 9% annually over the course of 10 years. Significantly higher if the appreciation rate is upped.

"What caused you to pick a 10 year note?"

My quick estimator spread sheet for these things only runs out 10 years of ownership, and I usually assumes to pay the loan off in the same time frame. I would never run a 30 year on a beach condo, it's just not realistic.

If I go back and extend the duration of the loan in the original calculation to 30, and sell in 10, the numbers are far far worse - net after tax from the sale after 10 years on a 10 year loan @ 3% apprec. is 251K, net on a 30 year loan is 131K. Without paying the loan off in the time frame of ownership, an investment like this is a major loss based on my original calculations.

The important thing here is that this investment at the numbers Fly gave costs you money to carry it, so your return is going to be less than what you put into the original loan.

Lets get rosey on it for fun -

30K annual income w/3% appreciation on cash flow
20K annual cost w/2% appreciation on cash outflow
10 years of ownership
30 year loan @ 6% w/20% down
4% appreciation on the property

after tax annual return - 9.73%

There's your 9% figure, but everything else has to go really well in order to get it.

What caused you to pick a 10 year note? Did I miss something that Flyguy posted about that in his scenario?
Cutting through much of the above: a %20 down payment of $245,000 is $49,000. In the propsed scenario $20,000 collected annually pays the mortgage/int/taxes, breakage etc.-All costs associated with owning. Let's disregard rent increases or decreases and consider it breakeven throughout Flyguy's ownership. If at the end of 10 years we use your 3% appreciation and have a sales price of $329,000, less your commision rate, we end up having turned $49,000 into $120,000. Using my nugget and the rule of 72 that seems to be a pretax return of a bit more than 9% annually over the course of 10 years. Significantly higher if the appreciation rate is upped.

Maybe this is the difference in our calculations, my assumption was that the debt service was not included in the 20K? If that's the case, then his carry costs are not 20K, they are 6K per year. That changes things a bit -

appreciation - after tax return
3% - 11.4%
4% - 13%
5% - 14.6%

Which is a good investment. Is 6K a year for all ownership costs outside of the interest on the 30 year loan reasonable for a condo? I've never seen anything that low in the few condos I've looked at. It's usually much higher, around 10K-17K annually for a new development.

Maybe this is the difference in our calculations, my assumption was that the debt service was not included in the 20K? If that's the case, then his carry costs are not 20K, they are 6K per year. That changes things a bit -

appreciation - after tax return
3% - 11.4%
4% - 13%
5% - 14.6%

Which is a good investment. Is 6K a year for all ownership costs outside of the interest on the 30 year loan reasonable for a condo? I've never seen anything that low in the few condos I've looked at. It's usually much higher, around 10K-17K annually for a new development.

30ashopper,

I too consider myself a numbers person. I don't want to go into hashing out all of the assumptions and what ifs. If you and I were sitting at a table we could easily do it in 10 minutes. On this board it could take a dozen posts. But to answer your question cash flowing in my example includes the principle and interest and everything else with zero appreciation..

The tax angle is what makes this whole thing work for me. Before taxes the cash flow is negative, it is after taxes where the money shows up. Depreciation, tax bracket, and how the ownership is structured makes a difference. And if I ever decide to sell I don't plan to pay any capital gains taxes (based on current tax law which could change).

JMHO
Flyguy

I think if one buys at these current prices and subtracts carrying costs (and considering the "ownership aggravation" will cancel out "ownership joy"), in 10 years I think the condo will return somewhere between "in-the-hole" to "lucky to be breaking-even."

.

We have had our place for 10 years now and I can tell you that the 'ownership aggravation' is nowhere close to the 'ownership joy' for us.

I'm sure it varies by owner, the amount of use you get out of it, and what types of 'aggravation' crop up.

30ashopper,

I too consider myself a numbers person. I don't want to go into hashing out all of the assumptions and what ifs. I you and I were sitting at a table we could easily do it in 10 minutes. On this board it could take a dozen posts. But to answer your question cash flowing in my example includes the principle and interest and everything else with zero appreciation..

The tax angle is what makes this whole thing work for me. Before taxes the cash flow is negative, it is after taxes where the money shows up. Depreciation, tax bracket, and how the ownership is structured makes a difference. And if I ever decide to sell I don't plan to pay any capital gains taxes (based on current tax law which could change).

JMHO
Flyguy

Sorry didn't mean to try and tell you your business, I just like running numbers.


What's your plan on avoiding capital gains? Home-sale exemption which I think is still on the books?

Sorry didn't mean to try and tell you your business, I just like running numbers.


What's your plan on avoiding capital gains? Home-sale exemption which I think is still on the books?

No apology needed. I appreciate your posting as I am always open to different ways of looking at things.

We may very well be considered full timers in a few years for the home sale exemption and then there is also the 1031 exchange.

Flyguy

I will state up front that I am not a real estate agent nor am I a stock broker. I don't hold a Series 7 license or any other kind of license.

We, as a collective society, have decided that agents should be compensated on a contigency basis. Another way to spell contigent is risk. An agent has to sell his/her services, advertise and beat the bushes just to get a client. Then, the agent is expected to pull surveys of available properties, comparables and have full and complete knowledge at their fingertips. After all this effort, there is no assurance that their client will buy a property or even quality for financing. For every closed sale of a property there are others which evaporate after a lot of effort.

Perhaps we could emulate what agents do in Britain. You want an agent? Hire one. Whether you are a buyer or seller, hire an agent, negotiate the agency agreement and pay the fee. My guess is that most buyers and sellers would not feel good about paying an agent an hourly rate for services rendered or even a stipulated fee. Suppose you are a buyer and an agent quotes you $125 per hour or say, a flat fee of $7,000 to represent you. Assume the same if you are a seller. You want an objective agent? You now have one. Problem is, whether you buy a property or not, you pay the $7,000. If your home sells or not, you still pay the agent's fee. I can hear the thunderous hooves stampeding to sign up for this program.

Yet - yet - we have no issue paying lawyers $200 per hour. If we hire a lawyer to represent us in a civil suit on a contingency basis, the lawyer keeps one-third for his or her trouble. I am afraid that as human beings, we can only see the glory is what others do and what they earn. My guess is that it has been that way since Neanderthal man looked out his cave and evaluated others. We don't see the would-be buyers who are not serious, who want to kick tires and have no compunction about using an agent to show him where the cars are. And when times are good, nobody complains: everyone makes money and that makes everyone happy. When the systems slows down however, we start looking out that cave. If you are being pinched as a seller, talk to your agent. There may be flexibility in the equation. To summarily dismiss an industry because the tide has turned is just plain wrong.