When an Investment is Not an Investment

Watch on your mobile device >>

A buyer recently stopped at one of our open house events. He wanted to make an “investment”—buy the condo for let’s say $300,000, put down $60,000, pay it off as soon as possible and then reap the rewards! Not so fast!

So what is wrong with this picture? Almost everything. To compare investments, I use a cash-on-cash approach—what’s your immediate actual return on the investment. This differs from return on investment that’s used to calculate long-term investments and takes into consideration different aspects like future appreciation and the cost of money. Cash on cash looks at what the return is today.

So take that $300,000 condo and finance $240,000 of it at 4% and you have a loan payment of nearly $1,500 each month with tax. Top it off with $300 in homeowners’ association fees as well as insurance and you’re up to paying out more than $21,300 a year.

The going rent for this kind of property in the area should be in the range of $1,500 to $1,650 with a year lease.  Let’s go with $19,800 as the best case scenario so right away he will be in the hole every year by $1,500.  And this does not even include closing costs, vacancies, management costs, and maintenance costs, but if we apply all these costs, then he’s dug an even deeper hole.

As you can see, this isn’t an investment because he is instantly in a negative cash flow situation. Considering all the expenses, he will never get his money back, unless the value goes way beyond the $300,000 and he sells it for a profit. Keep in mind the buyer is making a $300,000 decision and doesn’t hire a professional for help. This is not an investment, but rather a purchase based on a lot of speculation.

So he’s better off with a CD. Although we can find good cash-on-cash investments, it takes a lot of effort.
If we can help you realize your real estate goals, please call us at (858) 205–1020 or email us at www.buy-sell-sandiego.com.

Market Puts Sellers in the Driver's Seat

Watch on your mobile device >>

Everyone asks us about the market. A very important factor that influences the state of the market is inventory. The supply of homes is dwindling and, in fact, it decreased substantially in the first quarter. Since there are fewer homes on the market, there’s more competition for those available homes, so what does this mean for you? Here are a few tips for both buyers and sellers.

Sellers are in control, so don’t lose an opportunity when it presents itself. Low inventory often translates into multiple bids, high list-to-sale price ratios and being able to negotiate better terms. It’s a great time for sellers. 

When selling your home, if you want to get top dollar for your property, take advantage of the low inventory. Here’s the thing: supply and demand affect what you’ll get for your home. When everyone who has been thinking about selling their home puts their home on the market is not the time to dive in—if you want to get the most out of your home. At the end of the day, you have a better chance at success if you decide to sell now, instead of waiting until all the Joneses get into the market.

If you’re in the market to buy a home, patience and timing are everything. When a home that you’re interested in hits the market, plan to see it as soon as possible and make the best possible offer that’s at an appropriate price point for the seller. Remember, inventory is low. If you hesitate, the property could be gone because others will be making offers. 

Keep in mind that mortgage loan rates are still fantastic, which makes buying a home more affordable than ever. A 30-year fixed-rate mortgage hovered at record-low rates during 2012 and are still low into 2013, but the rates won’t last forever. If you wait and interest rates rise, you could get locked into spending a few hundred extra dollars a month on your payment.  

Give us a call so we can tell you where to be positioned and how to be successful in the market. Please contact us at (858) 205-1020. We’d be happy to assist you.