Tuesday, November 28, 2006

Rent Dilemma
We are remodeling and went today to look at a condo to rent. The condo is new and similar units are selling for approximately $500K to $520K. The association fee is $200 a month. I figure - using 20% down and a 7% return on equity - the condo would have to rent for $3,300 a month. This would cover debt (interest-only in my assumption), property taxes, the association fee and provide the 7% return. The asking rent is $1,800. I figure the owner is carrying at least a $900 negative every month. This is nuts. Real estate is an income play. I don't get the logic of buying a property that will not provide at least a 7% rate of return. But as a short-term renter, I like it.

This should be a measure of the over priced real estate market. Rents are going to have to increase significantly or prices are going to have to drop to narrow this disparity. A quick calculation shows that the condo should be worth about half its current price - $260,000 not $520,000 - to justify its $1,800 rent. This covers debt, taxes, association fee and provides a 7% return on equity to an investor. If I owned this property with a $520K basis, I'd be scared. I bet the owner did not run any numbers and thinks future appreciation will erase all his negatives. Good luck.

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