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Calculating Break Even on your first investment 7 posts by 6 users

Ajay G.

Homeowner
simi valley, CA

Posted: 02/17/2008 at 07:01PM

Hi,
I am new to this blog as well as the world of investing. Here's my scenario:

I am looking at a condo which is priced at $200k in Thousand Oaks, CA.
I have $10,000 to put down in this investment
That leaves me with a mortgage of $190k
The monthly rent in the area seems to be $1400
I have A+ credit therefore feel that I should be able to secure a decent mortgage
My question is other than, tax, property tax, mortgage what other costs should I calculate in order to figure out my b/e as well as the fact that this is a good investment? Thanks for your help in advance.

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Jon H.

Real Estate Investor
Denver, Colorado

Moderator

3990 posts

Posted: 02/17/2008 at 07:33PM

Your principle & interest payment should be around $1100, depending on the exact rate you get. Taxes and insurance are easy enough to figure out. The taxes should be in the listing, and insurance can be quoted by an agent. The other biggie for a condo will the HOA charges. That should also be included in the listing. Need to check on the financial soundness of the HOA. Just guessing, I'd say taxes, insurance, and HOA will add up to more than $300.

Will this property appreciate in the coming years from the $200K you're paying now? My guess would be not. If anything, I think you're likely to see prices fall, since they've gone up so much now. See if you can find out what these units were selling for in 2000, and add 20%. I think that's the baseline value for these. Assume they will be worth maybe 10-15% over this baseline 5 years from now. And, easily 10-15% below the $200K a year from now.

I'd consider renting, in that area.

But, keep in mind, I don't live there, and I don't see what's going on in detail. There may be factors I'm unaware of that are driving demand, or have already hit prices hard.

Jon

MikeOH

Real Estate Investor
Ohio, Ohio

2665 posts

Posted: 02/18/2008 at 04:19AM

Omega,

You can determine your monthly cash flow by subtracting the mortgage payment from 1/2 of the gross monthly rent. Obviously, the property you are looking at is a HUGE LOSER.

Good Luck,

Mike

Ajay G.

Homeowner
simi valley, CA

3 posts

Posted: 02/18/2008 at 08:20PM

Originally posted by "Wheatie"

Your principle & interest payment should be around $1100, depending on the exact rate you get. Taxes and insurance are easy enough to figure out. The taxes should be in the listing, and insurance can be quoted by an agent. The other biggie for a condo will the HOA charges. That should also be included in the listing. Need to check on the financial soundness of the HOA. Just guessing, I'd say taxes, insurance, and HOA will add up to more than $300.

Will this property appreciate in the coming years from the $200K you're paying now? My guess would be not. If anything, I think you're likely to see prices fall, since they've gone up so much now. See if you can find out what these units were selling for in 2000, and add 20%. I think that's the baseline value for these. Assume they will be worth maybe 10-15% over this baseline 5 years from now. And, easily 10-15% below the $200K a year from now.

I'd consider renting, in that area.

But, keep in mind, I don't live there, and I don't see what's going on in detail. There may be factors I'm unaware of that are driving demand, or have already hit prices hard.

Jon

Thankd for the info. I really appreciate it!

Daniel L.

Real Estate Investor
Baltimore, MD

9 posts

Posted: 02/19/2008 at 06:26AM

Personally, I see a problem with calculating for breaking even. In my opinion, you should never, ever buy a property with negative cashflow. I would only buy break even if the property is located in an emerging market. I honestly don't think this property is going to appreciate greatly in the future.

Negotiate for a lower price that makes the numbers work. If you can't get that, then move on. Perhaps you could work on your marketing to get better deals coming in?

Take my advice with a grain of salt though, cause I'm still learning :)

John C.

Real Estate Investor

3399 posts

Posted: 02/19/2008 at 06:54AM

Originally posted by "omega"

Hi,
I am new to this blog as well as the world of investing. Here's my scenario:

I am looking at a condo which is priced at $200k in Thousand Oaks, CA.
I have $10,000 to put down in this investment
That leaves me with a mortgage of $190k
The monthly rent in the area seems to be $1400
I have A+ credit therefore feel that I should be able to secure a decent mortgage
My question is other than, tax, property tax, mortgage what other costs should I calculate in order to figure out my b/e as well as the fact that this is a good investment? Thanks for your help in advance.

Be careful about focusing on the break even as if that is all it takes. Things break, properties go vacant, tenants fail to pay, etc.

The break even discussion is the most common when people think prices are rising. If prices are flat or falling breaking even means making no progress for multiple years.

John Corey

Jason J.

Real Estate Investor
Thousand Oaks, California

61 posts

Posted: 02/19/2008 at 07:06AM

While I generally agree with what others have said, I think investing in SoCal is a little different. I live in Thousand Oaks, so I know this market fairly well. I have 3 rental properties out of state since that's the only place I can find properties that are positive even with 50% expenses.

However, I too have put an offer on a short sale condo here in T.O. that would break even. It's $100,000 less than it sold 1 year ago and about 30% below current market value. I'd be happy to find a break even rental at 30% below market value in this area. However, I'd be sure I had some cash reserves on hand to cover any negitives (i.e. vacancy, maintainence, etc.).

SoCal is a different market and different rules apply.