Is a high property value area a bad area? - Posted by Suz Hall

Posted by qstaff on August 18, 2003 at 22:17:36:

High end properties can be lucrative to rent IF you get the property at a great price. True, most people at that end of the financial spectrum can afford to buy, but some people want to rent usually for one year, for a lot of different reasons. Maybe they are new to the area and don’t want to buy until they are sure what area they want to be in, maybe they are only going to be in the city for one year, maybe they are waiting for a house to be built–there are all kinds of reaons. Maybe it’s an older person who sees no point in buying (I just had one of those God rest her soul–and often there is not much to rent in this category, which means you can gouge a little if so prone. That said, I wouldn’t mess with anything I couldn’t pay the mortgage for should it be empty for several months or so. If I lived in Philadelphia (which I don’t) I’d checked out the area around Penn.

Is a high property value area a bad area? - Posted by Suz Hall

Posted by Suz Hall on August 17, 2003 at 11:40:28:

Hi Guys,

I apologize if this is a dumb question, but I have never owned a rental, only my own home. I live in a rapidly growing area outside of Philadelphia and I look at properties and think. . .Why would anyone rent here? Who could afford to rent here?

The average home prices in my area are very expensive (about 400K.) There are lesser areas around, but in my mind, even in those places where the properties are 200K you would have to have a huge downpayment or set the rents so high to recoup the mortgage and taxes (which are a killer around here–they could easily add $250 per month to a 100K property) why would anyone pay that rent?

If anyone has a chance to answer this question–Are there some areas that just aren’t good for renting or have you found that everything is relative?

Thanks in advance, again, I apologize if it seems like a silly question!

Suz

Re: Is a high property value area a bad area? - Posted by Frank Chin

Posted by Frank Chin on August 18, 2003 at 08:47:40:

Hi Suz:

First you don’t buy SFR’s in 200K to 400K areas to rent them out. There are some exceptions, and these work in “high appreciating areas” such as NYC, San Francisco etc.

My brother in law is one exception. He’s a doctor with high income, a wife with high income, plus a free and clear multi family. Add that to high taxes in California.

So he did a 1031 for two SFR’s where he made a huge down payment, plus picked up a mortgage. Things were arranged so that there’s no income derived from the rent for tax reasons.

In effect, he created a tax shelter for himself. Prices of the SFR in the 400K range when he picked it up, and peaked at $1,000,000 a year or so ago in San Franciscon. So he doesn’t need to charge sky high rents, but just enough to carry the mortgage, show no income or a slight loss for tax purposes.

He’s making his money on appreciation.

I own a SFR that I bought 20 years ago for 70K as a preforeclosure, and I now rent in out for $1,700/month. Market rents are $2,000/month plus. FMV for the SFR is in the 300K range, give or take.

For me, the appreciation is the main thing, and cash flow is the gravey. My P&I, esrcow only comes to $1,200/month this year, up from $1,100 just a year or so ago.

Another exception I know of is a freind of mine who rents a SFR in a 400K area. The owner is only charging $2,250/month.

The owner is an executive from Taiwan, and expects to be back in a few years. He’s only charging enough to carry the expenses till he returns.

With these exceptions, it really doesn’t pay to buy SFR is 200K to 400K areas to rent out. The corrallory to this rule is there’s hardly anything for rent in these areas.

That’s the reason SFR in these areas are easy to rent if you’re a landlord, but difficult to find if you’re a renter.

But these areas are definitely not for cash flow investors.

Frank Chin

Thanks! - Posted by Suz Hall

Posted by Suz Hall on August 17, 2003 at 13:50:33:

Thanks Guys,

Both replies were very helpful! Its always nice to get feedback from REI veterans!

Thanks again.

Suz

Re: Is a high property value area a bad area? - Posted by Brent_IL

Posted by Brent_IL on August 17, 2003 at 12:17:14:

I think it is relative, but there seems to be a range where it is hard to find renters. As you’ve said, the rent would have to be set high.

Folks that can pay substantial rent can usually afford to buy. Inexpensive housing in fair shape will rent at a higher rent to FMV ratio than will moderately expensive houses. Provided that you can locate a renter, very expensive properties will command excellent rent also because there are quite a few high-wage earners who spend every dollar they make. Their credit is lousy, and they can’t get a loan, but they can afford substantial lease payments.

I’d look in the newspaper to see what the rental rates are in your area. You can call up some RE agencies that do property management and ask for info. Describe a standard purchase and tell them you are thinking of renting your house out. They may give you the top of the range in an effort to get your business, so make sure the info is consistent with other sources.

You’ve made a wise observation… - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on August 17, 2003 at 12:00:30:

Suz Hall–(PA)---------------

You’ve made a wise observation, in my view. By the way, the “pa” in my email-address is for “Palo Alto” CA, where I used to live not “Pennsylvania, I’m too lazy to spell it out.”

The ratio of rent to the value of the property goes down the higher the value of the property. Thus, the more expensive properties are less efficient as rent generators. If you want to invest for cash flow, you have to go down into the lowest-priced neighborhood that you can stomach, in my view. While things may be different in different parts of the country, buying over $200K houses is probably not wise. In some areas, $100K and above is too high to pay.

If you keep it under $75K, you are much more likely to do well with your cash flow. I invest in properties which are valued about $15K to $40K. Very good cash flows there. I try to pay less than 1/2 price for them, even at that.

Good InvestingRon Starr***