Simple Profit Formula for Residential Investment Property

An article in the Los Angeles Times recently defined the Redbrick Rule as a simple formula to calculate the percentage yield for most properties costing $250,000 or less. Redbrick Partners manages investment funds made up of single family houses. This simple rule of thumb is a good start for the small investor looking at single family investment properties.

The theory contains the following hypotheses regarding expenses:

1. Vacancies and bad debt: The range is 6% to 10% of the rent charged. Other factors that affect the percentage are local demand, marketing skill in renting the property, and the rent charged in comparison to the market rent.

While some landlords figure their vacancy costs at 3% to 5%, the do not account for spending money to collect their rents as well as the cost involved in evicting tenants.

2. Insurance: Use a larger amount that what the seller is paying, because you will need to insure for a larger amount (as the property is worth more now). Use 6% of your rent for insurance costs.

3. Maintenance: On average about 11% of the rent charged will go towards repairs and refurbishing in between tenants.

4. Property taxes: Be prepared for a reassesment and a supplemental tax bill. This cost tends to be about 11% of rent charged.

5. Management: While many small residential investors tend to go with themselves as the manager, they forget to account for the cost involved. Of course, a management company would cost more for management. Redbrick Management advises to use 6% of rent as the management cost.

6. Capital expenses: This cost is for those items beyond the maintenance expense. This would be for roof replacement or other such expenses. One will probably spend 1% of the home's market value or 8% of rent charged.

Here's the rule applied in an example:

1. For a $60,000 home (for the cost of the home, take into account the closing costs and transfer taxes), you are able to charge $1,000 a month in rent or $12,000 per year. Divide that in half and $6,000 will be used for costs or expenses. Then divide the $6,000 by the $60,000 cost of the home. Your answer will be a 10% yield without accounting for appreciation.

For someone that already owns a property, they may apply the rule and figure the cost of the property to be the current value less closing costs and transfer taxes.

Technology and Lifestyle Trends Shift Design

Home design seems to be as chameleon-like as fashion according to an article in the LA Times Real Estate section this weekend. As homeowners shift their lifestyle and technology interests and habits, what buyers want in a home continues to change.

A few weeks ago, the LA Times reported that more than 2/3 of new homes built are two-story homes. The reason seems to be the lack of land available and the buyers desire for more square footage than older homes. This also goes hand in hand with the amenities that interest buyers.

Home developers and builders spend a lot of market research resources on finding out what bells and whistles will make buyers desire their homes. These trends are generalized and a major one includes making enough room for a flat screen television. In the past couple of years, the popularity of flat screen televisions has increased dramatically as the prices for this technology has decreased.

If you are a potential home seller spending money on home improvements, here are some other trends to keep in mind:
1. New garages are built two feet deeper to accomodate SUVs and minivans.
2. Outdoor kitchens and living spaces are hot.
3. Living rooms are a less important space and the trends is shifting towards homes without living rooms. Think about doing something creative with a living room that makes it a multi-use space.
4. Homes should be less formal (go back to #3), easier to maintain, and room-use flexible.
5. Hobby and game rooms are increasing in popularity again. As in fashion, trends repeat themselves.
6. Home offices are also becoming more important.
7. Private space for family members (in-laws or older children) or caregivers is a plus with bedrooms appearing off the kitchen or garage.
8. Elaborate laundry rooms are used more.

And where builders fall short, designers like Andy Zeff of Dzign in Marina Del Rey come in and make corrections.

While these may be the current trends that market research has found from buyers, realize that this too will pass. Whatever you may do with your home, make it work for you, your family and your life.

Fuel prices affect everything

Yesterday I visited with an accountant that echoed the concerns that many financial analysts have stated on news channels recently. Fuel prices have dramatically risen lately and that will affect prices for all goods including homes. The cause and effect is this:

1. Fuel prices rise.
2. The cost to ship goods rises with the cost of fuel. Gas and energy costs also rise.
3. How much people can afford to pay for homes decreases.

Well, there is another aspect he mentioned. Income has not risen along with the rise in fuel prices. Therefore, people will not be able to afford as much home. Because California still has an increasing population and is not overbuilt with homes, the expectation is that we will see a leveling of prices and extended time on the market for listed homes.

This seems to be starting already. While the year to year sale prices have increased in Los Angeles county (as published monthly in the LA Times Real Estate Section by Dataquick), the month to month may not be the same.

Look back soon for results on the month to month sales in Los Feliz.

Second Home Market Rapidly Grows

Second homes sales amounted to more than 33% of all residential transactions this past year. The National Association of Realtors conducted this study and release the information last Tuesday, March 1st. The research also showed nearly 25% being bought as an investment and 13% bought as vacation homes.

The National Association of Realtors has been watching the second home market for quite some time. Last year in their magazine, Realtor, they featured second home sales as one of the top trends to watch in real estate for 2005. Another conicidentally is the aging home buyer.

The second home market is largely fueled by baby boomers and is expected to grow over the next several years.

That's why Michele Moore at H&M Estates has created a department specifically for Second Home sales. The function of the department is to educate, consult and make referrals. A toll free informational hotline and other "insider" updates allow clients to utilize the firm in making their second home purchases.

For more information, please contact Michele Moore at (310) 351-9051.

Significant Appreciation for Downtown Los Angeles Residential Real Estate

While the focus in the Southern California real estate market has been on the rapid double-digit appreciation of homes, the condo market has also experienced an upswing. In fact, over the last few years, prices for condos have appreciated at a greater rate than homes.

Some real estate developers are following a trend that is changing the face of neighborhoods. Taking the lead are urban in-fill and mixed use developments. A concentrated example of this is the Downtown 'revival'. According to the Los Angeles Business Journal on January 12, 2005, the area is outpacing the appreciation of prime markets like Brentwood, Westwood, and Beverly Hills.

Many real estate developers and owners are optimistic about a continued appreciation in prices as the construction continues. Even with the slowing of the real estate market, they believe prices will appreciate even more once the planned $1 billion sports and entertainment district around the Staples Center is finished.

Press Room and new email

Last week, one of our French chateaus was featured on Fox News (www.foxnews.com) as one of "The Most Romantic Homes" in the world. The other homes that were featured in this Valentine's Day special can be found at http://www.barbaracorcoran.com/barbara-live-romantic-homes.asp.

Current updates and events for this week are as follows:

1. H&M Estates has a new email address for inquiries. Please write to info@hmestates.com regarding any questions on the Los Angeles, Bel Air, Hollywood Hills, Santa Monica, Beverly Hills, Los Feliz or Malibu real estate markets. If you are looking for a second home anywhere in the United States, United Kingdom or France, please send an inquiry. Our other offices in London and Paris may assist you.

2. The villa in St. Jean Cap Ferrat that is available for 38 million Euros will be featured this week in Dolce Magazine (www.dolcemag.com) and The National Post (www.nationalpost.com). Copies of these articles will be available on the H&M Estates press room soon.

3. Next week, Michele Moore, the Estates Director for H&M, will be speaking at two events regarding international luxury real estate. One is for realtors at the West San Gabriel Valley Board of Realtors, and the other is a private investor event in Manhattan Beach. These events are closed to the public, but information inquiries may be made to info@hmestates.com.

Slowing January Los Angeles Residential Real Estate Sales

On February 14, 2004, the Los Angeles Business Journal (www.labusinessjournal.com) reported on January’s slowdown in home prices. Some economists believe this is a a sign of a weakening market, but some real estate agents indicate that buyers are still getting into heated bidding wars.

Here is more text from the online story:
"Last month, the median price of an L.A. County home rose 17 percent year-over-year to $414,000 – the smallest increase in nearly two years, according to DataQuick Information Systems (www.dataquick.com).
Overall home prices, along with sales volumes, have been flat countywide for six consecutive months, leading some economists to proclaim that the Los Angeles housing market is stuck in neutral. The general consensus is that year-over-year increases could shrink to 15 percent or less, compared with the 25 percent or greater year-over-year increases that have been the norm.
“We have evidence the market is cooling,” said Christopher Thornberg, a senior economist at the UCLA Anderson Forecast (www.ucla.edu), who has said for the past year that the market is in a bubble. “It’s clear the market is starting to slow down.”
Just last week, Cleveland-based mortgage lender National City Corp. released a report that found Los Angeles home prices were over-valued by 32 percent, the fourth-highest such market in the country. The conclusion was based on factors such as population density, incomes and interest rates.
Still, realtors complain of not having enough homes to sell for the number of buyers on the market. The California Association of Realtors reported last month that the inventory of homes listed for sale had shrunk to a low not seen for six months.
Realtors say that buyers, many motivated by a fear of a looming spike in mortgage interest rates, are aggressively pursuing homes on the market.
*The full version of this story is available in the Feb. 14 edition of the Los Angeles Business Journal."

The six million dollar question - is there a housing bubble?

The market could not expect to continue double digit percentage increases forever. Every market goes in cycles. When demand is up, prices move up and vice versa. The funny thing about the Southern California real estate market is that our supply of homes continues to be tight. Still, the affordability index shows that many cannot buy a home with their income today.

Bloomberg (www.bloomberg.com), Investor's Business Daily (www.investors.com) and the Los Angeles Business Journal reported that Smith Barney Citigroup (www.smithbarney.com) analyst, Stephen Kim, downgraded six major homebuilder stocks. Included in the downgrade from "buy" to "hold" were KB Home (www.kbhome.com), Pulte Homes (www.pulte.com) and Ryland Homes (www.rylandhomes.com). He also added that this was the first downgrade in a couple of years. This may imply a plateau in the stockprices of these companies.

While mortgage interest rates continue to be relatively low and inventory also low, we will most likely not see a crash in the market. A definite change in the real estate market cycle from a rapid increase in homeprices to a slowdown seems to be beginning.