Monday, September 14, 2009

Condo Equation Doesn't Add Up

If you are in the market for a condo on the Westside, you may want to think again. A good rule of thumb is :

Monthly Rent x 12 x 15 = Sales Price

Let's do an example for Santa Monica. If we take a 2br 2ba condo, North of Wilshire, built in the 90s, renting for $2300/month, and listed for sale at $800,000, we come up with:

$2300 x 12 x 15 = $414,000

or to purchase:

$160,000 down
$640,000 mortgage at 6 percent
$8,000 in yearly property tax
$4,000 for yearly insurance
$4,000 for HOA

To purchase this condo we get:

$3,837 mortgage/month
$666 property tax / month
$333 insurance /month
$333 HOA / month
$5169 / month, while putting $160,000 at risk of evaporating, just to "Own" a place. Sure you would get a tax break, but it doesn't add up, unless you spend 10 - 20 years there.

Your better off renting at less than 1/2 the price, with no worries. Plus, you can move when ever you want as opposed to being trapped inside your purchase, or damaging your credit to get out. In addition, you are losing the opportunity to invest that $160,000 for 10 -20 years in something else. Finally, rents are dropping on the Westside, so the equation changes even more to your favor.

Regardless, the condo equation of buying instead of renting just doesn't add up!


Anonymous said...

Does this formula apply for houses and condos too?

If a Sunset park home rents for 3k/moth, your formula would have the selling price as $720,000...which doesn't exist for a 3 bed/2 bath home in 90405

A multiple of '20' instead of '15' would be closer....

Anonymous said...

I agree with you 100%
12x15 is the rule

Just be aware of the fact that the nice houses North of Montana in the franklin district rent for 12 thousand a month

That translates in to a sale price of 2.2 million

Anonymous said...

12K a month? What? No way.

How much does a 3 bed/2 ba nicely located home (SFR, not condo) rent for in 90405?????

Anonymous said...

Are you saying these houses rent for less than 12k or more than 12k

what is it that you are claiming - cause I say 12k and you say no way

Anonymous said...

try rents from 7-8k per month, no more.

Anonymous said...

I respect your point of view very much. We all know that there is a gap between asking price and actual rented price. However take a look at these listings on the MLS - these are from today, Tuesday

232 23Rd St Santa Monica, CA 90402 Rental $25,000
3 Bed, 5 Bath | 4,540 Sq Ft

250 23Rd St Santa Monica, CA 90402 Rental $18,000
5 Bed, 6 Bath | 5,602 Sq Ft

310 22Nd St Santa Monica, CA 90402 6 Rental $15,000
5 Bed, 5.5 Bath

There are plenty more where this came from. The point is that renting a nice house in the Franklin School District North of Montana for under 12 thousand is a pipe dream.

Again, I wish that it was not so, but there it is. 12k to rent

Anonymous said...

This is why I have been renting these last 3 years here. We owned for many years before moving here and had no mortgage. Why on earth would I buy, take on a mortgage, and lose large amounts of money every month over renting? I have to wonder at the people who buy condos here. By my calculations with being in the 42% state and federal tax bracket, I would have to find a comperable unit to the one I am in now for less than $500k to consider buying as I can't be sure we will be here more than 5-10 years. We rent for $3,400/month. I could gamble on high inflation coming, but we are still losing so much in the commercial and residential real estate markets that Obama can't inflate us that fast and I don't anticipate inflation until that changes and salaries rise as well as employment levels. It could be a while.

Anonymous said...

Unless someone *must* stay in the Santa Monica area, why would you put away 2,300 as rent? Whenever you pay more than 1200-1500 as rent you have to think hard whether its worth the flexibility/freedom it offers.
2300/mnth could get you a nice condo in the Palms, Mid-city or Marina del rey area. There plenty of work around LA (where else would you rather go? And if you'd rather go somewhere else, leave now!) and you can easily 'stay put' for 5 years.

Anonymous said...

Please do not compare apples to oranges. Palms and north Santa Monica are not comparable whatsoever. 1200-1500 rent does not exist North of Santa Monica. Those are two distinctly different neighborhoods.

I really hate it when ppl lon this blog lump the entire westide together.

Anonymous said...

Palms is in no way like the 90402.
Different species

Anonymous said...

Have to rent a, kids, cars need to be in separate garage, much in Sunset Park?

alvin said...

"Whenever you pay more than 1200-1500 as rent you have to think hard whether its worth the flexibility/freedom it offers."

Where does that arbitrary limit come from? What one should really focus on is how much the relative cost to rent vs own is over the expected time period one plans to live in the home. Hence the ratio that westsidebubble presents, which is inline with what the market historically has determined to be a fair multiple.

by the way, 232 23rd has been on the rental market at $25k since October 2006. What does that tell you? Renting in 90402 doesn't come cheap, but you can definitely find a "nice" house for less than $12k/month.

Anonymous said...

I pay more in rent because we had 3 kids when we moved in and I still have a teenage boy and girl so we need 3 bedrooms unless we want to sleep in our living room or some such. We also have a large dog and the cheap rentals rarely allow pets, but less big ones. Very nice rentals even in Palms/Mar Vista cost more. We are solidly mid-career and eventually plan to buy in the $500k-$600k range because I am a tightwad. This is under the 3x annual income multiple for us. We paid cash for our last 2 homes and I want to either pay cash or pay off the place fast. As long is renting is cheaper I will continue to rent. Often markets over correct if one is patient and I will not lose large sums renting as I would have had I bought.

I have noticed that people often assume that renting is not a choice, but it often is. People with lots more cash than we have choose to rent around here. The question is not what we pay per month, but the cost of renting versus the cost of buying. ANything else is totally irrational.

Latesummer2009 said...

Houses NOM "trying" to rent for $12,000 a month are not asking 2.2 million. I would venture to say it's more like 3.5 - 5 million. At those rents, the house is way overpriced.

Formula works for houses too. Only in some more desirable areas, it would probably be closer to 20 x annual rent. Even so, it still doesn't come close to pencilling out.

Anonymous said...

what are ACTUAL rents being paid on "nice" homes in great neighborhoods? Figure $2-2.50 per sq. foot. $12,000 for a 5,000 sq. ft house, that can happen. But not much more. If your "nice" house is 3,000 sq. feet, you might get it for $6,000 per month!! (YES, that is a real rent in a TOP neighborhood.)

Anonymous said...

I get $6K for for 1700 sq. ft home (furnished,maid service, etc.) in Sunset Park.

Production companies jump on it for their overseas clients who stay here years months/years, whatever.

Can't imagine what a fancy house 2x or 3x my house size fetches in NOMO

Anonymous said...

Dear 8:43am --

so what you are saying is that you found a base of overseas renters.

You provide maid service and furnishings. Also, you are doing short term leasing, whereas most leases require 1 year minimum. You are running a hotel.

Also, you have a small place that might satisfy the needs of this niche. See if the overseas production companies want to do $10,000 or more for a bigger place... probably not.

In the end, though I congratulate you on your excellent results, your pricing is not a comparable for the houses being discussed here.

Anonymous said...

I am truly miserable - So far in 2009 the buyers of skanky disgusting shacks North of Montana have come out of the woodwork and are buying -

How the heck are prices where I want to live going to drop to a reasonable level when people keep buying today

just some examples -

720 17th, 1/1, 6/26/09, $1,400K
320 9th, 3/2, 5/20/09, $1,600K
415 17th, 3/3, 6/15/09, $1,600K
714 Euclid, 4/3, 9/2/09, $1,600K
620 22nd, 3/2, 8/19/09, $1,625K
210 21st, 3/3, 4/14/09, $1,700K
636 16th, 2/2, 8/21/09, $1,700K
517 14th, 3/2.75, 4/16/09, $1,775K
716 18th, 3/2, 5/29/09, $1,780K

Not a single one under a million bucks.

Anonymous said...

10:20 anon


Anonymous said...

Anon September 16, 2009 9:56 PM,

Realtard much?

Anonymous said...

Realtors are the worst kind of scum. But you are mistaken when you say that the realtors don't want prices to fall. The farther down prices go, the more buyers come out of the woodwork to buy. I know of a realtor that shows this blog to his clients who are selling houses as a way to bludgeon then to lower prices

The point is that realtors love having their sellers read this blog because sellers that lower prices = commissions

The barrier to low prices is not the realtards but rather the sellers

Anonymous said...

"The barrier to low prices is not the realtards but rather the sellers"

Not really... it's the *buyers*. If nobody was paying near list on houses, prices would plummet in a hurry. Until people stop buying, this is gonna drag on forever.

Anonymous said...

Everyone on this blog is hungry to buy but is standing by waiting for lower prices

The realtors are on your side. Think about it - prices in Palmdale and Lancaster and Temecula fell 70%

After the plunge buyers rushed back in and the realtors in those places made an absolute killing

Huge plunge in prices = lots of money in the pocket of the realtors

Realtors are praying to the same god as everyone on this blog - praying for North of Montana to fall 70%

Anonymous said...

"Realtors are praying to the same god as everyone on this blog - praying for North of Montana to fall 70%"

Well, then they should advise *all* their buy-side clients to wait. It may mean a few lean months, but if buyers just went away for a while, the desired result could possibly be achieved. :-)

Anonymous said...

How about a little honesty here?

The realtors desperately want the storyline of this blog to be true.

What is the storyline of this blog? Huge numbers of people took out liars loans and NINJA loans North of Montana. These people can't pay their mortgage and are going to default on their debts. The banks will foreclose and put huge numbers of houses North of Montana on the market. The banks will refuse to rent them out and will basically tell the realtors to sell them fast no matter what. As a result, the houses will be put on the market at 70% off of peak prices.

Go back and read this blog - that is the plot.

Imagine how many buyers there are ready to pounce at 70% off? Basically if the plot was true, huge numbers of people would sell what they own in Sunset Park and Ocean Park and simultaneously buy North of Montana. The brokers would have a double windfall - all the houses sold in Sunset Park and Ocean Park and all the people moving up to North of Montana.

Your fantasy is the broker's fantasy.

However, while the brokers wait for their fantasy to come true they will happily sell whatever homes they can sell North of Montana at today's crazy high prices - but the real money for the brokers comes AFTER the crash to 70% off

Again, The brokers get rich in the scenario put forth by everyone posting on this blog

Anonymous said...

The story of the last 20 years is that the neighborhoods that attract the cutting edge, creative, zesty people rocket ahead of the neighborhoods that just attract the boring straight arrow types.

Hello? Hancock Park had the most prestige 20 years ago. Plenty of blue blood old money Los Angeles families. Got news for you - Hancock Park is up VERY VERY little in the past 20 years compared to neighborhoods like Venice.

Venice 20 years ago was a shocking smelly pit filled with taggers and skateboarders and welfare moms. Flash forward 20 years - it is still pretty dangerous but it has rocketed upwards in value. I would bet that if you put 100 thousand down on 1 million in Venice property 20 years ago you are now 5 times as rich as if you put 100 thousand down on 1 million in Hancock Park

The point is, buy in the cutting edge up and coming hoods. Don't buy in the established blue blood places

Anonymous said...

With Option ARMs and Alt-A mortgages resetting in 2010-2012, the housing market will turn down for the worst. This is an epic housing bubble that is imploding.

Anonymous said...

Actually, what Realtors want is to promote as many sales for as much money as possible. While they will take any sales they will get, they are clearly NOT lobbying for falling prices, at least not as a group.

The NAR has been intensely lobbying in Washington not just for an extension of the current $8,000 first time buyer's credit but for a $15,000 credit for ALL buyers. Naturally this would both increase sales and increase prices as well, even if only by $15,000 per house.

Make no mistake, they lobby to facilitate both increased sales and increased prices. After all, 3% of 2 million as a lot better than 3% of 700,000.

The $20 billion spent on the first time buyer credit seems to have completely eluded the "tea party" crowd. If the NAR gets its way, the price tag for the new credit would exceed $100 billion a year, or more than the sum annual total of health care reform. And it is advancing completely under the radar of the anti-"big government" crowd.

Anonymous said...

no way insurance on that $800k condo is $4k a year. more like $1k probably less.

Anonymous said...

The condo experiment is an utter failure. Touting an alternative life style to middle class America, their developers failed to take into a declining market. The deal killer is HOAs. It's a second mortgage and fraught with problems. A condo is basically a fancy apartment, but to lure people into them they built gyms pools, porterage etc, which all costs money. Get rid of all that and you have a sweet investment.