... stranded flippers !!!! In other words, real estate speculators have purchased houses with the intent of quickly flipping them to a 'greater fool' at an even higher price than they themselves paid, but falling real estate prices prevent them from doing so. Thus the flippers are 'stranded', and must choose between selling the spec house at a loss or pulling the house off the market and renting it out while waiting for real estate prices to rise again.
(snip)" We own some commercial income property, so I decided to use the same basic formula to the house we’re renting.
I agree with whomever it was that said, “Real Estate Investing is Fifth Grade Math.”
For your amusement… Here’s the math for our rented house in Arizona:
Income:
$ 14,400- We pay $ 1,200 in monthly rent
Expenses: (estimated yearly)
$ 1000 Vacancy Allowance & Collection Losses
$ 1500 Prop Taxes (verified)
$ 900 Insurance
$ 1000 Maintenance & Repairs - normal & between tenants
$ 400 Home Warranty
$ 180 3 Home Warranty Deductible for Visits
$ 200 yearly accounting & legal fees
$ 1000 Property management, advertising & rental commissions
$ 250 Utilities while vacant
$ 250 HOA fees
$ 250 misc. expenses & administrative costs
======
$ 6,930 Total Yearly Expenses
$ 7,470 Net Operating Income Before Debt Service
$ 7,470 / $ 335,000 (they paid) = 2.23% ROI if they paid cash for the property
or:
$ 7,470 / 12 = $ 622 to make a payment at 100% financing to break even monthly
$ 622 / month net monthly income ~ 30 year mortgage ~ 6.5% APR ==
$ 98,407 Purchase Price
(not counting transaction costs & other expenses when purchased)
So… somewhere between $ 98K and $ 335K is probably what this place is “worth”
Obviously I’ve rounded off the corners in the estimates, but these are pretty scary returns when looking at the “P/E” ratio of the house we’re living in here in the NW Valley of the Sun.
So when you see somebody taking their new-build house “off the market” to rent it out for a while “waiting for the market to go back up” you can quickly estimate where they’re really at."(snip)
Basically, in order to break even on renting out a 100% mortgaged property at current interest rates in a market that will support a $1200 per month rent price, the flipper had better not have paid more than $98K to purchase the property. Unfortunately, odds are that the flipper actually paid 3 times that amount, meaning that they are losing money every month that they continue to rent the house at prices that don't come close to covering their expenses plus mortgage payments.
Additionally, there are probably thousands of other flippers who are in the same position in the same rental market, refusing to sell their spec property at a loss in the current real estate market and therefore attempting to also rent their vacant spec houses in order to recover some amount of monthly cash flow. This means yet more supply of rental properties, which will only create more downward pressure on local market rental costs.
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