$10,000 Now or $10,000 Five Years from Now
At the end of October in the first issue of this newsletter, I featured a property in San Jacinto that I subsequently acquired in November for $119,000 and spent $12,000 renovating. The property was listed as having a market value at the time of about $200,000 and the market rent was listed as $1500. In response to that newsletter, many readers questioned whether the rent was realistic given the price of the property. After marketing the property for rent for about two months, I just secured a tenant paying $1575. Having stabilized the property, this seems to be an appropriate time to make a couple of observations.
Market Value v. Discount Price
One of the objectives of this newsletter is to arm the readership with information that can be used to meaningfully interpret what is published for general consumption in the media. The distinction between market price and discount price is a perfect opportunity to meet this objective. Discussion in the media about prices falling as a result of the continuing onslaught of foreclosures refers to the market price. In the example of the San Jacinto property, it would mean that the expectation is that the market value of $200,000 will drop in 2009, which, in fact, it already has. If you were considering buying this property as a primary residence and planning to pay market value using an FHA loan for example, you would be somewhat concerned about when you decided to pay market value. Otherwise you could very quickly end up upside down. If, on the other hand, you are an investor paying a discounted price then what you care about is whether the discounted price is likely to be discounted any further by distressed sellers like REO asset managers. The answer to this question depends on demand at the discounted price level. As I explained to readers last year, the discounted price will not fall when there are multiple offers within a week of listing a property, which is the case in San Jacinto and areas like it when the listing price gets this low. As a result, the discounted price in this area has actually increased despite the fact that the market price has fallen. This is another way of saying that I haven't been able to secure another deal at this price since closing on this property. Why are investors bidding up the discount price? The short answer is that the high rent in the area relative to the low purchase price generates a very high immediate return (see article on Price/Earnings Multiple in Issue 4 of this newsletter at equityispower.com).
Time Value of Money
The second point has to do with the general preference to make money now rather than later. Let's assume for the sake of discussion that for some reason the discounted price of $119,000 were to go down over the next 6 months by another 10% to $107,000. You would not recapture that additional $11,900 until you sold or refinanced the property after the market recovered. Assume that the market will recover in 5 years. If, however, the tenant scheduled to move in on the 15th of this month pays $1575 in rent for 7.5 months you would have $11,900 by fall of this year. I will spare you present value calculations on $11,900 in five years versus $11,900 by October, but suffice it to say, most people consider $11,900 by October considerably more valuable. That is why investors are actually overbidding on the severely discounted properties and these properties are almost impossible to get on a consistent basis. This opportunity didn't exist in California in 2006 because in 2006 this property sold for $349,000 and therefore didn't cash flow. Now it does.
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LOL - Laughs OnLine
"That ice machine was the best investment I ever made!"
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What's The Big Idea? 
A couple of weeks ago I decided that I simply needed to get in better shape. I prefer to swim so I looked for a gym that had an indoor pool and joined the Bally's in North Hollywood. After going to the gym a couple of times here is what I discovered. Men shave in the steam room despite the sign on the door that says "Don't Shave in the Steam Room". Men blow their noses in the shower and only God knows what they do in the pool. Shortly after my second trip to the pool, I got the flu and was down for a week. Now, the rational conclusion is that this is flu season, so I might very likely have gotten the flu regardless of whether I decided to exercise in a Petri dish. Nevertheless, you just can't help but wonder whether the cardiovascular benefits of swimming are outweighing the harm of the bacteria bath. I am not a germophobe. I don't even wipe shopping cart handles at the grocery store. But, swimming at the gym is a different level. If my picture shows me with a third eye at some point in the future, you will know why.
Protecting Yourself When Your Loan Is Sold
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Share If You Care
Our goal with this newsletter is simple: Cover every important topic that might help homeowners and investors make more informed decisions concerning real estate. You can help in two ways:
1) Send us any articles or information you come across that might be of interest to other readers
2) Forward this newsletter to anyone and everyone you know that owns or plans to own real estate!
Sincerely,
Kwame J. Granderson
Equinaire
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Investor Tip
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Lawns are a big deal to tenants. You cannot imagine how many tenants have walked out on their leases because the owner refused to maintain the lawn properly. Often the cost of mortgage payments and renovation costs to make the house rent ready far exceed the cost of the landscaping that would have satisfied the tenant.
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