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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.
