patrick.net

It looks like the $520/month is likely the Principal and Interest payment on $100K. I'm not sure if taxes are 1.25% in the Bay Area. If they are, you have to add $156.25/month for Taxes. Maybe another $50 for Insurance... And then the $300 HOA. If the property manager charges 8%, that's $120/month. Adding those up, you get $1146.25/mo. I would also save 10-15% for vacancies, maintenance, the unexpected... at 10%, that's $150/mo for a total of $1296.25... roughly $200/mo profit times 12 months is $2400/yr for a 4.8% annual return. If you add in tax write offs and appreciation, it'd be higher. That seems low, let me double check my math:

$1500 Rent
-$520 PI
-$156.25 T
-$50 I
-$300 HOA
-$120 Management
-$150 Vacancy/Maintenance/Unexpected
____________________________________________
$1500-$1296.25=$203.75x12=$2445/$50000=4.89%
Without saving for vacancy/maint/etc (a perfect world scenario) the return would be 8.49%

On the upside, eventually rents will rise giving you a better return and eventually you will have no mortgage. And like I said before, there's probably tax advantages that increase the return.

I'm no expert though, I'm still waiting for the bubble to deflate a little further before I buy my first house. I'm sure I missed something... and I'm sure someone on here will point it out.

Hello Tony,

Thanks for very detailed post.

The property tax which you have made as 1.25% would be per annum I believe. So per month it would be 156.25/12 = 13.02. Also, renter is required to buy renter's insurance at most of places. So 50 per month could be taken off. That would lead to
$1500 - 520 (PI) - 13.02 (T) - 300 (HOA) - 120 (Management) - 150 (Vacancy)

= 397.98 per month
= 4763.76 per year
= 9.52% return on 50K investment.

Cheers!

Hey Robbie,

It sucks, but taxes are going to be more than $13.02 per month. $150K x 1.25%= $1875 per year / 12 months = $156.25 per month.

I'm not sure if the HOA includes fire/hazard insurance. But I know that renter's don't have to have insurance. I've never had it. And if your renter has it, I think it only covers his contents. I don't think it will protect your property or your liability in case he trips on your carpet and falls down your stairs, etc. or if the condo gets vandalized when the tenant leaves or the property is vacant... Regardless of whether it's required, it seems like it would be a good idea to have landlord insurance. Your bank may even require it. I think the HOA has some kind of insurance built in. If it does, you might find that landlord insurance is less than $50/month... but that's just me guessing.

In any event, a return of roughly 5-6% isn't bad right now. With time (future rent increases) it will likely get better. And again, appreciation (very long term) and the inevitable mortgage payoff are to be looked forward to.

Good luck!

$150k x 1.25%/yr = ~$150/mo prop tax

Taking a 3.5% 15 year fixed over the 15 year horizon:

Total interest paid: $30,000.
Prop Tax: $28,000.
Tax credit: $20,500 (35%)

Interest/property tax less credit over 15 years: ~$40,000, ~$200/mo.

RE pros no doubt count principal repayment as a cost but I don't since that's money you get back when you sell the asset.

Other costs are insurance ($1000/yr ?) and management fee ($1500/yr?) Those add up to another $200/mo. Throw in the vacancy factor for another $200/mo, maintenance set-aside, $100/mo, and the $300 HOA.

So we're up to $1000/mo in costs not counting the $400/mo principal payments starting out (these grow as the principal is paid down).

The one thing that can get you is the assumption of $1500/mo rents. I think it's quite possible we'll be seeing $1000 for these 1B places. These don't roommate well and to make the rent at $1000 requires 23 hrs/week @ $10/hr take-home.

$1000/mo rent would make these break-even for you and not that good an investment, unless you like owning 1B condos in San Hosay.

Also you need to have in mind the opportunity cost on $50,000 + $100,000 in principal repayment.

Hello Tony,

Thanks for the correction on tax.

I made a mistake there.

I will check for insurance cost with an insurance agent and also how much is HOA with the realtor since I have just randomly come up with 300 number. If it is 250, it could add to the savings.
Every possible cost should be counted in before making any decision. I agree with you that even 5-6% return on investment is not bad.

robbie says

Any other assumption or point I missed? Besides some repair expenses.

You're assuming

1. That you can rent it out. Covenant Condition Restrictions can limit the number of rental units in a development.

2. That you can get a mortgage. Freddie Mac won't buy condo mortgages in developments unless at least 51% of the units are owner occupied and no single investor owns over 10% of the units.

1bd for 1500. Man I'm glad I don't live in Bay Area, to me out here that seems like insanity to pay that much for 1bd shelter.

robbie says

Also, renter is required to buy renter's insurance at most of places.

What Tony said -- absolutely not true that the renter has to buy renter's insurance. What is more likely is that your mortgage company will require homeowner's insurance. The HOA won't cover everything, and as Tony said, even if the renter has insurance, it doesn't cover your interests.

Drew also makes a good point -- there are restrictions on this.

Also, if you get an owner-occupied loan and don't intend to occupy the property, that's fraud.

robbie says

I agree with you that even 5-6% return on investment is not bad.

It's actually not that great on a rental property. You have higher risks and should get a higher return in many cases.

Don't forget you'll be able to depreciate the non-land portion of the property (1/27.5 per year). This helps with taxes (passive losses up to $25,000), but there is depreciation recapture when the asset is sold. Phaseouts for the passive loss limits begin at $100k (married, filing jointly).