investments (8)

Why San Jose Condos Make Good Rental Properties

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I am frequently asked by San Jose real estate investors, both veteran and new, what is best for San Jose rental investments, multi- family homes, single family homes, or condos.

 

My first answer has been the same for decades: “Are you most concerned with appreciation or cash flow?”

 

The answer to this question depends on a variety of individual goals. What has changed over the years is what is best for cash flow.

 

Historically San Jose rental property appreciation has been best in this order:

 

  1.      Single family home
  2.      Condo
  3.      Multi family home

 

Historically San Jose rental property cash flow has been best in this order

 

  1.      Multi family home
  2.      Condo
  3.      Single family home

 

This long held wisdom that a multi- family home is the best San Jose rental for cash flow is being disrupted by the latest market forces. Right now, CAP rates are better on newer condos than older multi- family homes, and are much easier to take care of.

 

The CAP rate on a San Jose rental property is a measure of cash flow. To figure it out you take the income minus expenses (assuming no loan) and see what percentage of the price of the property the expenses are. 4% is on the high end of what you can expect in this market, and many investments are in the 2% range for single family homes and 3% for multi family homes.

 

Let’s take a sale of a duplex in Japan town as an example of a San Jose multi- family sale in 2016.

 

Sales price was $1,000,000

 

Expenses including property tax, utilities, garbage, repairs, insurance total $15,200

 

Income is $43,200

 

Cash flow:  $43,200-15,200 is $28,000

 

Cap rate is the what percentage of $1,000,000 is 28000 or 2.8%

 

At this time duplexes are not covered by rent control, but that may happen in the future,

 

This duplex, like many of the homes in downtown San Jose, is very old. This one was built in 1930. While charming, they need a lot of repair and in many years repairs will be over $2000 a year which was this years estimate.

 

Now take that same $1,000,000 and apply it to two studio condos in a beautiful downtown San Jose building called Axis. I have a client who does own 2 studio condos at Axis that are rentals so these are real numbers.

 

Market value: $500,000 each $1,000,000 for both

 

Expenses including HOA, HO6 insurance, property tax and repairs is $24,000 for both

 

Income: $

 

Cash Flow: 57200- $24,000 = $33,200

 

Cap rate: 3.3%

 

In this case this new building needed very few repairs, there will never be rent control per California state law, and the HOA covers most of the insurance, water and garbage, and the repairs of the common area.

Here is another example of a clients cash flow at The Brickyard, a less expensive building than Axis San Jose, but a great downtown San Jose rental with the best HOA management company I have ever experieinced.

 

2 condos worth $370,000 each or $740,000

Expenses including property tax, HOA, HO6 insurance, repairs $19,400

Income: $48000

Cash flow: 3.9 % 

Things to watch out for as the building ages is making sure there is enough in the building reserve fund to cover expenses as the building ages.

 

When the reserves are healthy the future looks brighter for the condos because:

 

  1.      There is no fear of rent control
  2.      There will be no needed foundation repairs, earthquake upgrades, termite issues etc for the individual San Jose rental investor to deal with in the future as the building is new and the HOA covers these issues.

 

Of course every case of San Jose rental properties is different, but if you are thinking about buying a San Jose rental property a condo can be a great investment for cash flow, not just appreciation.

If you have any questions about buying a rental property in San Jose please feel free to contact me.

Marcy Moyer

Keller Williams Realty

Specializing in Probate and Trust Sales

650-619-9285

marcy@marcymoyer.com

www.marcymoyer.com

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How to properly evaluate a potential investment property

photo credit: Håkan Dahlström via photopin cc
photo credit: Håkan Dahlström via photopin cc

Life is full of sayings that seem contradictory at first.  Expressions like “a chain is only as strong as its weakest link” and a “team is only as good as its worst player” seem to make no sense until they have been analyzed and understood.  In flipping homes, you make your money when you buy.  Quite simply, if you buy a home at the proper discount then you have a much better chance of selling at a profit.  Here is a general outline to help you evaluate a potential home for investment.

First, Take a Casual Drive

It is a good idea to only consider homes that you can actually inspect.  Being able to drive by the home gives you a firsthand perspective. On your way to the home pay attention to the little details such as

  • condition of the roads; are there large potholes, pavement patches, adequate street signs?
  • local area; are there any schools, shopping, offices, or factories nearby?
  • Appearance of the actual street; how do the other homes on the block look?
  • The prospective home; what is your first impression when you see the place?

Second, take a Casual Stroll

Now that you have had the time to look at the home and surrounding area from the road, it is time to actually look at the property up close.  When you are in the home ignore things like carpeting and paint.  Take time to look over the roof, the foundation, the electrical box, the HVAC unit and any plumbing pipe that is easy to access.   Walk outside and see if the septic tank or well has any problem.  These are the areas that can cost major money to fix.  If there are any noticeable problems with these primary parts of the home you can use that to negotiate with the seller.

Third, crunch some numbers

Now that you have looked over the home and determined that it is a possible investment, it is time to do the math.  You need to have an idea of what the total repairs will cost along with how much the home should be worth after the repairs are completed.  Once you have these numbers you can make an offer to the seller.

When putting together your repair estimates it is always better to over price.  Trying to cut corners and dream that the kitchen can be remodeled for $2,000, or some other wishful hope, will cause you tremendous grief later on.

After you have looked at a few homes and talked with the same contractor a number of times you can start to get a feel for how much repairs will cost.  This one skill takes some time to master for those that are new to real estate investment.   Once you are comfortable estimating repair costs you will be much better at spotting a deal when it pops up.

Search for: Madison, WI Foreclosures for Sale

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Homeowners looking for the most return on their investment when remodeling should consider exterior replacement projects. According to the 2013 Remodeling Cost vs. Value Report, Realtors® rated exterior projects among the most valuable home improvement projects.

“Realtors know that curb appeal projects offer great bang for your buck, because a home’s exterior is the first thing potential buyers see,” says National Association of Realtors (NAR) President Gary Thomas. “Projects such as siding, window and door replacements can recoup more than 70 percent of their cost at resale.”

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Whats Next?

So…Where are we heading in this market? Countless moratoriums at the Federal and State level. Moratoriums from the banks themselves trying to work out loan mod’s. Local Judges refusing to evict homeowners., Local sheriff’s doing the same. Now we have programs like HAMP and Court decisions like National Bank v. Kesler. There is such an underpinning of resentment from the American people against not only the Banks but corporate America as well. Will this sentiment continue to stall the inevitable? I for one am of the opinion that the market must be allowed to run its course. Real estate is and always has been cyclical. Yes, this is one of the worst markets we have seen in decades but “this too shall pass”.There is a huge amount of shadow inventory the banks are holding. Release it. By all means, do loan mod’s for people who are able to, for people who were duped into loans they could not afford. Help those that we can but at the end of the day these loan mod’s are mere Band-Aids, just delaying the inevitable by a year or two. Put the homes that are foreclosed on the market. Foreclose on the homeowners that have no justifiable means to pay those notes and let the market work its way out. It will be ugly or uglier than it has already been…But we will see quicker return to normalcy. The Government would be better served by spending to create jobs so that MORE homeowners do not lose their homes.So, how do we repair it once it hits “Sea Level”?Keep interest rate levels low and keep the tax incentive for first time home buyers.Ease restrictions on investors purchasing multiple properties. (This is key to the rebuilding)Ease restrictions on homeowners who have had foreclosures and or BK’s to get back into the market.Create restrictions so Banks can no longer offer exotic loans (I hear new ARM programs are coming)There are many others but I would love to hear some other ideas.
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Another housing slump coming?

From MSN Money today. BofA and Wells Fargo have both been on the record stating that the "shadow inventory" does not exist. This is the third published report I have read that sates otherwise. As servicers continue to trickle product into the market there is a strong chance that this will prolong the housing slump for more than originally thought. The tsunami we have all heard about, while driving prices continually lower might rid the market of this distressed inventory faster and perhaps hasten a quicker recovery...Thoughts?Analysts say 7 million soon-to-be foreclosed properties have yet to hit the market.Posted by Elizabeth Strott on Thursday, September 24, 2009 8:59 AMAny optimists touting a housing recovery might want to pause and think about this: Amherst Securities Group analysts believe the market faces another major hurdle because about 7 million properties that are likely to be seized by lenders have yet to hit the market.The "huge shadow inventory" reflects mortgages already being foreclosed upon or now delinquent and likely to be and, assuming no other properties are on the market, it would take 1.35 years to sell this inventory based on the current pace of existing-home sales, analyst Laurie Goodman wrote in a note to clients.In 2005, there were 1.27 million properties in the same situation.There have been a number of recent economic reports hinting at a recovery for the housing market. In May and June, the S&P/Case-Shiller 20-city index of home prices rose, the first month-over-month increases in values since 2006. Prices for U.S. homes rose by 0.3% in July from June, the Federal Housing Finance Agency reported earlier this week."The favorable seasonals will disappear over the coming months, and the reality of a 7-million-unit housing overhang is likely to set in," the analysts said, according to Bloomberg News .Meanwhile, The Wall Street Journal reported on Wednesday that real-estate agents and analysts worry that when the shadow inventory is unleashed, it could cause a big bump in the road to recovery and add a new layer of difficulty for the housing market.Ivy Zelman, the chief executive of Zelman & Associates, a research firm based in Cleveland, believes 3 million to 4 million foreclosed homes will be put up for sale in the next few years. The question is whether the flow of these homes onto the market will resemble "a fire hose or a garden hose or a drip," she told the paper.
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These are staggering numbers. I heard a lecture from an analyst from Anderson School of Business at UCLA which was a bit gloomier than this but these are some of the gravest predictions I have seen in print. Will we see more aggressive programs from the administration to combat the forecasts? The various moratoriums so far have had less than robust results. A contact at Wells Fargo tells me they have had less than a 1% success rate in loan mods. I can't see a substantial turn around until at least 2013, any thoughts?From Housingwire.com.By AUSTIN KILGOREAugust 6, 2009 4:18 PM CSTDeutsche Bank (DB: 66.81 +3.39%) believes continued declines in home values will increase the number of US mortgagors with negative equity from 14m in Q109 to 25m in Q111.According to a report Deutsche released this week, the 25m represents a projected 48% of all US mortgages. While subprime and option adjustable-rate mortgages (ARM) are the biggest source of underwater borrowers in the current market, Deutsche said a larger percentage of prime conforming and prime jumbo borrowers will join the fray.Prime conforming and prime jumbo will make up 79% of all US mortgages and Deutsche estimates 41% of conforming and 47% of jumbo will be underwater, up from current levels of 16% and 29%, respectively.This rapid influx of underwater borrowers will have a significant impact on default rates. In addition to future underwater borrowers being forced into default from a “life event” — unemployment, divorce, disability, etc. — Deutsche warned others may “ruthlessly” or strategically default.Increased defaults in the middle class will suppress consumption, added Deutsche, further slowing housing recovery.It’s hard to predict exactly how high the default rates will go. The current housing recession is unique in that it was brought on and perpetuated by a number of factors — unstable loan products, crashing housing prices, and unemployment, among others. Deutsche cited a study of the Massachusetts housing decline of the late 1980s and early 1990s that showed less than 7% of underwater borrowers defaulted as perspective on the default rate for underwater borrowers.But in the early 1990s, borrower and loan product quality were significantly better, the home price decline wasn’t as severe, and unemployment was lower. Deutsche said the 7% experienced in Massachusetts should be the floor — a best-case scenario — for the surge of underwater borrowers it expects in 2011.Borrowers with loan products with already high underwater rates will only get worse.By 2011, Deutsche predicts 89% of option ARM borrowers will be underwater, up from 77% in 2009. The rate of underwater subprime borrowers will increase from 50% to 69%, and underwater Alt-A borrowers will increase from 49% to 66%.An important factor to consider is how deep underwater borrowers will be, and it depends on their loan type.For prime conforming borrowers, Deutsche predicts the number of borrowers with negative equity — loan to value (LTV) between 105% and 125% — will virtually equal the number of borrowers with what it calls “severe negative equity” — LTV over 125%.But Deutsche expects the 89% of option ARM borrowers underwater to be split with most — 77% of total option ARM borrowers — holding severe negative equity. For underwater prime jumbo loans, more borrowers will have severe negative equity — 29% of the combined 47%.The split for underwater Alt-A borrowers is expected to take an opposite proportion, with 49% of all Alt-A borrowers in negative equity and only 18% in severe negative equity. Underwater subprime borrowers will face a similar breakdown.
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Low-End Sales Rocket in California

Once again misinformation hitting the media! What this article doesn't say is that inventory in California has decreased primarily due to lack of new foreclosures coming on the market. Like most REO brokers in California I have watched my inventory shrink month after month as moratoriums from various institutions have worked themselves through fruition. In addition the banks have been holding back inventory trying to change the Mark to Market valuation system. A quick look at the mls will tell you there is just nothing to sell at this point. Watch the reported inventory numbers for August. It should be off the charts.Michael HowardXcel Reowww.xcelreo.comwww.xcelinvestments.comMay 29, 2009With almost a 50% increase in year-over-year sales, the inventory of unsold existing single-family homes for sale in California has been cut in half, from a 9.8 months' supply in April 2008 to 4.6 months' supply this April, the state's Realtors reported. However, while sales were up 49.2% to a seasonally adjusted rate of 540,360 — the eighth straight month above the 500,000 level — the median price of houses sold in the month declined by more than a third, largely because the majority of sales were at the low-end of the market. "Inventory levels for homes in the under $500,000 segment shrank to nearly three months in April, compared with almost 10 months a year ago, while unsold inventory in the more than $1 million segment rose to approximately 17 months, compared with roughly 10 months in April 2008," says California Association of Realtors President James Liptak. "The dramatic difference in inventory exemplifies how the low end of the market is attracting more first-time buyers and investors, creating a shortage of distressed properties for sale." The median price of existing homes sold in the month was $256,700, a 36.5 percent decrease from the revised $404,470 a year ago. But it was 1.4% greater than March's $253,040 median price. CAR's figures are based on data collected from more than 90 local Realtor associations statewide.
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Everyone knows REO properties can be purchased at discounted rates and that they are great investments. What not many know is that high end homes are even better bargains and in most cases can be purchased at even bigger discounts than your typical REO property. It is not uncommon, in our market, to purchase a property valued at $2million for $1 million. Here are some of the reasons why that market offers great deals:1. Fewer buyers in this market.2. Misconception jumbo financing is not readily available.3. Most buyers focus on properties which can be purchased with conforming loans.4. Misconceptions there is no REO inventory in the high end market.We just found out there is a major financial institution offering jumbo loans for buyers with 720+ FICO scores with 20% down and excellent interest rates. Furthermore, as more foreing investors enter the US distressed markets the high end inventory will probably be their primary investment choice. This would be a great time to invest in a second home, move up or simply invest an excellent tangible asset.
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