Irvine Rental market

[panda]

Just like trying to valuate a blue chip stock, you have to look at the median home price / median household income which I call the HI ratio. In Irvine the median home price is $759,100 while the median household income is $90,585 making the HI ratio slightly above an 8. It takes 8x the median house hold income = median home price in Irvine, sort of like a blue chip stock with a very high PE ratio. This is why numbers don't work in Irvine and speculating on appreciation alone with large negative cash flow every month is a dangerous game to play. Also putting down 40-50% on the property in order to cash flow is not financially wise due to greater opportunity costs elsewhere. In investment properties money is made through 1) cash flow 2) amortization of loan 3) appreciation 4) tax benefits. Appreciation is how wealth is built and usually Appreciation is a much larger percentage of the overall return vs cash flow and amortization.

Here in the North Atlanta market, you can still buy a 4 bedroom 2300 sq/ft new construction SFR in a solid "9" rated school more equivalent to Aliso Viejo High ("9" rated school) at a Gross Cap Rate of 10% with positive cash flow with only 20% down at purchase price below $200k. With $850k worth of capital, an investor can fully leverage all four legs in North Atlanta market and make his investment go a long way. In the 9 and 10 school zone here, our HI ratio currently ranges between 2.5 - 3.

 

[dream16]

36000 annual rent on 950k price is just 4.23% gross cap rate. Subtract all costs from there and you wud be looking at sub 2 pct. if i have 850k cask on me, i wud better put it in 90 pct treasury and 10 pct in junk bonds and wud come out same minus the headaches of beling landlord.

From cash flow alone standpoint, california is one of the worst markets for investment properties and Irvine is even more terrible with all the hoa, mello roos and all.

I agree as i am looking at a future of putting in $500/month out of my own pocket in a best case scenario even after i am successful by renting out the 2 bed room condo i own out for $2900/month

 

[Lanelgn]

Hi

We bought a new property (3br+2bath) in Cypress Village and the closing date is in April 2016.  Due to un-forseen circumstances, we will not be able to move to Irvine.  We are debating:

1. Rent out this property as investment for at least 5 years.
2. Back out the buying transaction which means we will loose 25K.

We see that current rental market in Irvine is RENTER market; many houses are for rent.  So we are thinking of solution #2.  We are looking for your wise inputs.  Thank you.

I dont know what you bought your CV house for.  However without knowing the price you paid, I can guarantee that you will NOT cash flow and in fact will lose money by renting it out.  I just know this from looking at many homes to see if they will cash flow as a rental.  NONE of them in this area do, ESPECIALLY new builds.

My numbers may be a bit off, but lets assume 750K purchase price for a 3bed/2bath around 1700 sq/ft in size.  Rental rates here for something like this will be about $3000 a month, give or take a couple hundred a month.  Assuming a 20% down, 3.75% rate, 8.33% vacancy rate (1 month per year), about 1000 a year for maintenance, 8% paid to property manager then you will have a negative cash flow of about 15k per year.  Even if you managed this yourself, its still about 13K negative a year.  Even if there was 100% occupancy, its still negative almost 10K a year.  If there is any depreciation of this house, which seems very well possible if not likely, then the situation is even worse. 

seriously, take a 25K loss and move on.  Its gonna hurt to lose 25K but in my opinion much better to move on now.  Also its one thing to deal with the headaches of being a landlord when you are making money.  But to lose money and still have to deal with that headache???  Oh man...

Do the property tax include the 1000 USD you mentioned?

 

[dream16]

Just like trying to valuate a blue chip stock, you have to look at the median home price / median household income which I call the HI ratio. In Irvine the median home price is $759,100 while the median household income is $90,585 making the HI ratio slightly above an 8. It takes 8x the median house hold income = median home price in Irvine, sort of like a blue chip stock with a very high PE ratio. This is why numbers don't work in Irvine and speculating on appreciation alone with large negative cash flow every month is a dangerous game to play. Also putting down 40-50% on the property in order to cash flow is not financially wise due to greater opportunity costs elsewhere. In investment properties money is made through 1) cash flow 2) amortization of loan 3) appreciation 4) tax benefits. Appreciation is how wealth is built and usually Appreciation is a much larger percentage of the overall return vs cash flow and amortization.

Here in the North Atlanta market, you can still buy a 4 bedroom 2300 sq/ft new construction SFR in a solid "9" rated school more equivalent to Aliso Viejo High ("9" rated school) at a Gross Cap Rate of 10% with positive cash flow with only 20% down at purchase price below $200k. With $850k worth of capital, an investor can fully leverage all four legs in North Atlanta market and make his investment go a long way. In the 9 and 10 school zone here, our HI ratio currently ranges between 2.5 - 3.

That is some very good old fashioned solid advice Panda, i couldn't agree more, however for a 1st time home-owner like myself, i do see buying in IR as a + not because of good rental opportunities here, but in the longer term, i myself want to live there as well.

If i had no interest in living in So Cal, then binging on appreciate alone can be a risky game as housing prices are already soaring high in 2016 with the possibilities of touching the peak of 2004-2005 in another 2 years in IR market and anyone will be way better off putting money in Atlanta/Florida and other states with 9+ schools/white neighborhoods/no mello-roos and minimal HOA ...there was an article that listed Edgecombe (NC) with 40% returns
http://www.realtytrac.com/content/n...orst-markets-for-rental-returns-heat-map-8023

 

[panda]

Dream16,
I will post up some updated charts tomorrow related to your link since the trulia data is almost 2 years old.

In your trulia link the "gross cap rate" I mentioned in my prior post is the same thing as the "annual gross yield" thanks for posting that link.

 

[qwerty]

Hi

We bought a new property (3br+2bath) in Cypress Village and the closing date is in April 2016.  Due to un-forseen circumstances, we will not be able to move to Irvine.  We are debating:

1. Rent out this property as investment for at least 5 years.
2. Back out the buying transaction which means we will loose 25K.

We see that current rental market in Irvine is RENTER market; many houses are for rent.  So we are thinking of solution #2.  We are looking for your wise inputs.  Thank you.

I dont know what you bought your CV house for.  However without knowing the price you paid, I can guarantee that you will NOT cash flow and in fact will lose money by renting it out.  I just know this from looking at many homes to see if they will cash flow as a rental.  NONE of them in this area do, ESPECIALLY new builds.

My numbers may be a bit off, but lets assume 750K purchase price for a 3bed/2bath around 1700 sq/ft in size.  Rental rates here for something like this will be about $3000 a month, give or take a couple hundred a month.  Assuming a 20% down, 3.75% rate, 8.33% vacancy rate (1 month per year), about 1000 a year for maintenance, 8% paid to property manager then you will have a negative cash flow of about 15k per year.  Even if you managed this yourself, its still about 13K negative a year.  Even if there was 100% occupancy, its still negative almost 10K a year.  If there is any depreciation of this house, which seems very well possible if not likely, then the situation is even worse. 

seriously, take a 25K loss and move on.  Its gonna hurt to lose 25K but in my opinion much better to move on now.  Also its one thing to deal with the headaches of being a landlord when you are making money.  But to lose money and still have to deal with that headache???  Oh man...

Did you factor in the mortgage interest tax deduction?  That would cushion some of the blow.

There will be no mortgage interest tax deduction. Once he rents it becomes its own business/p&L. For tax purposes he would show a loss and still negative cash flow. The original poster probably makes too much money to deduct a rental loss and probably doesn't qualify as a real estate professional to deduct rental losses.

 

[eyephone]

There is a good chance to get a good portion of your deposit back if you show any personal hardship or changes in your family circumstances.

Newinvestor - what is the reason?

 

[dream16]

Hi

We bought a new property (3br+2bath) in Cypress Village and the closing date is in April 2016.  Due to un-forseen circumstances, we will not be able to move to Irvine.  We are debating:

1. Rent out this property as investment for at least 5 years.
2. Back out the buying transaction which means we will loose 25K.

We see that current rental market in Irvine is RENTER market; many houses are for rent.  So we are thinking of solution #2.  We are looking for your wise inputs.  Thank you.

I dont know what you bought your CV house for.  However without knowing the price you paid, I can guarantee that you will NOT cash flow and in fact will lose money by renting it out.  I just know this from looking at many homes to see if they will cash flow as a rental.  NONE of them in this area do, ESPECIALLY new builds.

My numbers may be a bit off, but lets assume 750K purchase price for a 3bed/2bath around 1700 sq/ft in size.  Rental rates here for something like this will be about $3000 a month, give or take a couple hundred a month.  Assuming a 20% down, 3.75% rate, 8.33% vacancy rate (1 month per year), about 1000 a year for maintenance, 8% paid to property manager then you will have a negative cash flow of about 15k per year.  Even if you managed this yourself, its still about 13K negative a year.  Even if there was 100% occupancy, its still negative almost 10K a year.  If there is any depreciation of this house, which seems very well possible if not likely, then the situation is even worse. 

seriously, take a 25K loss and move on.  Its gonna hurt to lose 25K but in my opinion much better to move on now.  Also its one thing to deal with the headaches of being a landlord when you are making money.  But to lose money and still have to deal with that headache???  Oh man...

Sorry but i dont agree with the thoughts above, now picture this scenario:

1.You bought a brand new 2bed/2.5 bath 1600 sq ft condo for 550k @3.75% interest rate, $315/mo hOA and $3205 Mello Roos/Year, $450/year Home Insurance and you rent it out for $2900/month and there are property managers who will keep 5% of yearly rental amount.

2. Since you are buying a new condo, repair costs can be kept at a bare minimum of $200/year.

3. With 20% down payment, your monthly mortgage inclusive of HOA+Tax+Mello+Insurance = $3200/year ==> you will end up paying 400$/mo approximate after renting and are looking at 8-10k/year negative on a yearly basis....but if you have a smart CPA, you will deduct 16k(interest)+9k (property tax) + HOA (3780) & Home Ins (450) = 29.5k ONLY for your home expenses and then even if you do standard deduction of 12,500 = 43k/year , you are looking at receiving 13-15k in returns...and in the bigger picture/longer run, you will NOT only OWN the condo BUT also build equity

 

[dream16]

Hi

We bought a new property (3br+2bath) in Cypress Village and the closing date is in April 2016.  Due to un-forseen circumstances, we will not be able to move to Irvine.  We are debating:

1. Rent out this property as investment for at least 5 years.
2. Back out the buying transaction which means we will loose 25K.

We see that current rental market in Irvine is RENTER market; many houses are for rent.  So we are thinking of solution #2.  We are looking for your wise inputs.  Thank you.

I dont know what you bought your CV house for.  However without knowing the price you paid, I can guarantee that you will NOT cash flow and in fact will lose money by renting it out.  I just know this from looking at many homes to see if they will cash flow as a rental.  NONE of them in this area do, ESPECIALLY new builds.

My numbers may be a bit off, but lets assume 750K purchase price for a 3bed/2bath around 1700 sq/ft in size.  Rental rates here for something like this will be about $3000 a month, give or take a couple hundred a month.  Assuming a 20% down, 3.75% rate, 8.33% vacancy rate (1 month per year), about 1000 a year for maintenance, 8% paid to property manager then you will have a negative cash flow of about 15k per year.  Even if you managed this yourself, its still about 13K negative a year.  Even if there was 100% occupancy, its still negative almost 10K a year.  If there is any depreciation of this house, which seems very well possible if not likely, then the situation is even worse. 

seriously, take a 25K loss and move on.  Its gonna hurt to lose 25K but in my opinion much better to move on now.  Also its one thing to deal with the headaches of being a landlord when you are making money.  But to lose money and still have to deal with that headache???  Oh man...

Did you factor in the mortgage interest tax deduction?  That would cushion some of the blow.

There will be no mortgage interest tax deduction. Once he rents it becomes its own business/p&L. For tax purposes he would show a loss and still negative cash flow. The original poster probably makes too much money to deduct a rental loss and probably doesn't qualify as a real estate professional to deduct rental losses.

Oh no , there has to be some sort of a tax gimmick somewhere buried in the books because that leaves potential folks who want to rent out their properties in a bad situation. If the rental payments were equalling the mortgage amount, i can understand that we cannot claim mortgage interest tax deduction, but if not (i.e. case in 99% of rentals in IR), then the negative 10k must be compensated by the IRS to us, assuming the owner can barely make ends meet with a 100k salary and a wife to support.

 

[dream16]

Yes, I agree with the advice that has been given to you. $850k purchase price, 20% down, fetching $3000 rent is a terrible investment that you need to run from.

Please do not consider take the investment route on this. Agree with AW, see whatever you can do to fight and get your earnest money back. You will certainly lose a lot more from negative cash flow than your earnest deposit. For any worthwhile investment property you should target close to a 10% gross Cap rate : ( rent x 12 / purchase price) and 10% cash on cash return with potential for the asset to appreciate. In your case, it seems like you will have significant cash flow losses from the beginning. It is clear, that you need to cut your losses quickly and run.

Can you please elaborate on this formula with a real world example?

 

[qwerty]

3. With 20% down payment, your monthly mortgage inclusive of HOA+Tax+Mello+Insurance = $3200/year ==> you will end up paying 400$/mo approximate after renting and are looking at 8-10k/year negative on a yearly basis....but if you have a smart CPA, you will deduct 16k(interest)+9k (property tax) + HOA (3780) & Home Ins (450) = 29.5k ONLY for your home expenses and then even if you do standard deduction of 12,500 = 43k/year , you are looking at receiving 13-15k in returns...and in the bigger picture/longer run, you will NOT only OWN the condo BUT also build equity

you are forgetting the rental income that is your starting point. then you deduct everything you said. if you make over 150Kish you can not deduct rental losses.

 

[dream16]

3. With 20% down payment, your monthly mortgage inclusive of HOA+Tax+Mello+Insurance = $3200/year ==> you will end up paying 400$/mo approximate after renting and are looking at 8-10k/year negative on a yearly basis....but if you have a smart CPA, you will deduct 16k(interest)+9k (property tax) + HOA (3780) & Home Ins (450) = 29.5k ONLY for your home expenses and then even if you do standard deduction of 12,500 = 43k/year , you are looking at receiving 13-15k in returns...and in the bigger picture/longer run, you will NOT only OWN the condo BUT also build equity

you are forgetting the rental income that is your starting point. then you deduct everything you said. if you make over 150Kish you can not deduct rental losses.

Oops, ok here's the math on that: 2900*12 = $34,500 + 100k = 134,500 and now deduct the 10k rental losses, apparently never going to touch 150k lol

 

[Ready2Downsize]

No one has added in deducting depreciation. Not sure if you can claim that if you are cash flow negative but maybe if he/she has other properties that are cash flow positive it could help some.

 

[NewInvestor]

HI Everyone

Again thank you for all the replies.  One biggest reason that we are still lingering to option #1 which keeping the Irvine house and rent it out for AT LEAST 5 years because eventually even when we retire, we plan to live in southern CA.

1. We plan to enroll our kids into Irvine district school because we heard the schools there are good.  Where we are right now, the kids would have to go private school (public schools are very bad).  Even the situation right now that our kids are in kinder garden; POTENTIALLY when things change we can move to Irvine for middle and high schools.
2. We like Southern CA because Irvine is closed to Laguna beach and other beaches.
3. So the strategy is:  rent it out until the situation changes.  The worse case is 5-10 years, we will have a place in Southern CA for good schools and beaches to go to.
4. We have 20% down and can tolerate loss 1k a month.  We are not in real estate investment; so take that 20% down elsewhere in US to buy house is not an option for us. 

 

[eyephone]

HI Everyone

Again thank you for all the replies.  One biggest reason that we are still lingering to option #1 which keeping the Irvine house and rent it out for AT LEAST 5 years because eventually even when we retire, we plan to live in southern CA.

1. We plan to enroll our kids into Irvine district school because we heard the schools there are good.  Where we are right now, the kids would have to go private school (public schools are very bad).  Even the situation right now that our kids are in kinder garden; POTENTIALLY when things change we can move to Irvine for middle and high schools.
2. We like Southern CA because Irvine is closed to Laguna beach and other beaches.
3. So the strategy is:  rent it out until the situation changes.  The worse case is 5-10 years, we will have a place in Southern CA for good schools and beaches to go to.
4. We have 20% down and can tolerate loss 1k a month.  We are not in real estate investment; so take that 20% down elsewhere in US to buy house is not an option for us.

Sounds like uncertainty is the reason why you are asking the question. The market conditions changed for housing and the stock market.

 

[panda]

This is a good point. You calculate the depreciation by subtracting the value of the land from the purchase price / 27.5. Suppose the Purchase price is $850,000 and land value is $100,000. Your annualized depreciation is $27,272 a year. You can claim this with negative cash flow, but your limit on real estate losses is $25,000. This $25,000 limit also get phased out starting from $100k and completely phases out at $150k. One thing to be clear about, if you make more than $150k, your losses don't just disapprear but just get carried over the next year. One way to get around this rule is to be considered a real estate professional status in the eyes of the IRS. If you spend more than 750 hours in the trade of real estate, there is no income limits for you whether you make $20k/year vs $400k a year. You are also excluded from the $25,000 rental loss limit, which means unlimited rental losses to offset your earned income. What an incredible tax advantage this is for real estate professionals. Consult with your CPA to see if you qualify.

Going back to depreciation, if you hold this rent for 10 years, your total depreication will equal to $272,727.00. Once you sell this property, your depreciation recapture tax can potentially be $68,181 unless you 1031 exchange this property to another investment property. Many people mistakenly think that the depreciation deduction is free money which never needs to be paid back, but this is incorrect.

To never pay taxes on capital appreciation and depreciation recapture, one needs to continue to 1031 exchange and eventually can move these investment properties into an Irrevocable Living Trust. Once the property are transferred to your beneficiaries, they are free from any depreciation recapture tax which will disappear once you die.

No one has added in deducting depreciation. Not sure if you can claim that if you are cash flow negative but maybe if he/she has other properties that are cash flow positive it could help some.

 

[panda]

Once you make over $150k, your rental loss does not disappear, it just gets carried over to the following year.

3. With 20% down payment, your monthly mortgage inclusive of HOA+Tax+Mello+Insurance = $3200/year ==> you will end up paying 400$/mo approximate after renting and are looking at 8-10k/year negative on a yearly basis....but if you have a smart CPA, you will deduct 16k(interest)+9k (property tax) + HOA (3780) & Home Ins (450) = 29.5k ONLY for your home expenses and then even if you do standard deduction of 12,500 = 43k/year , you are looking at receiving 13-15k in returns...and in the bigger picture/longer run, you will NOT only OWN the condo BUT also build equity

you are forgetting the rental income that is your starting point. then you deduct everything you said. if you make over 150Kish you can not deduct rental losses.

 

[qwerty]

Well I'm assuming you will continue to make over 150k every year and you won't be able to deduct. When you dispose of the property you can make the losses part of your basis.

Once you make over $150k, your rental loss does not disappear, it just gets carried over to the following year.

3. With 20% down payment, your monthly mortgage inclusive of HOA+Tax+Mello+Insurance = $3200/year ==> you will end up paying 400$/mo approximate after renting and are looking at 8-10k/year negative on a yearly basis....but if you have a smart CPA, you will deduct 16k(interest)+9k (property tax) + HOA (3780) & Home Ins (450) = 29.5k ONLY for your home expenses and then even if you do standard deduction of 12,500 = 43k/year , you are looking at receiving 13-15k in returns...and in the bigger picture/longer run, you will NOT only OWN the condo BUT also build equity

you are forgetting the rental income that is your starting point. then you deduct everything you said. if you make over 150Kish you can not deduct rental losses.

 

[hello]

Hi

We bought a new property (3br+2bath) in Cypress Village and the closing date is in April 2016.  Due to un-forseen circumstances, we will not be able to move to Irvine.  We are debating:

1. Rent out this property as investment for at least 5 years.
2. Back out the buying transaction which means we will loose 25K.

We see that current rental market in Irvine is RENTER market; many houses are for rent.  So we are thinking of solution #2.  We are looking for your wise inputs.  Thank you.

I dont know what you bought your CV house for.  However without knowing the price you paid, I can guarantee that you will NOT cash flow and in fact will lose money by renting it out.  I just know this from looking at many homes to see if they will cash flow as a rental.  NONE of them in this area do, ESPECIALLY new builds.

My numbers may be a bit off, but lets assume 750K purchase price for a 3bed/2bath around 1700 sq/ft in size.  Rental rates here for something like this will be about $3000 a month, give or take a couple hundred a month.  Assuming a 20% down, 3.75% rate, 8.33% vacancy rate (1 month per year), about 1000 a year for maintenance, 8% paid to property manager then you will have a negative cash flow of about 15k per year.  Even if you managed this yourself, its still about 13K negative a year.  Even if there was 100% occupancy, its still negative almost 10K a year.  If there is any depreciation of this house, which seems very well possible if not likely, then the situation is even worse. 

seriously, take a 25K loss and move on.  Its gonna hurt to lose 25K but in my opinion much better to move on now.  Also its one thing to deal with the headaches of being a landlord when you are making money.  But to lose money and still have to deal with that headache???  Oh man...

Do the property tax include the 1000 USD you mentioned?

no the 1000 was just for maintenance but the taxes were taken into consideration.

 

[hello]

Hi

We bought a new property (3br+2bath) in Cypress Village and the closing date is in April 2016.  Due to un-forseen circumstances, we will not be able to move to Irvine.  We are debating:

1. Rent out this property as investment for at least 5 years.
2. Back out the buying transaction which means we will loose 25K.

We see that current rental market in Irvine is RENTER market; many houses are for rent.  So we are thinking of solution #2.  We are looking for your wise inputs.  Thank you.

I dont know what you bought your CV house for.  However without knowing the price you paid, I can guarantee that you will NOT cash flow and in fact will lose money by renting it out.  I just know this from looking at many homes to see if they will cash flow as a rental.  NONE of them in this area do, ESPECIALLY new builds.

My numbers may be a bit off, but lets assume 750K purchase price for a 3bed/2bath around 1700 sq/ft in size.  Rental rates here for something like this will be about $3000 a month, give or take a couple hundred a month.  Assuming a 20% down, 3.75% rate, 8.33% vacancy rate (1 month per year), about 1000 a year for maintenance, 8% paid to property manager then you will have a negative cash flow of about 15k per year.  Even if you managed this yourself, its still about 13K negative a year.  Even if there was 100% occupancy, its still negative almost 10K a year.  If there is any depreciation of this house, which seems very well possible if not likely, then the situation is even worse. 

seriously, take a 25K loss and move on.  Its gonna hurt to lose 25K but in my opinion much better to move on now.  Also its one thing to deal with the headaches of being a landlord when you are making money.  But to lose money and still have to deal with that headache???  Oh man...

Sorry but i dont agree with the thoughts above, now picture this scenario:

1.You bought a brand new 2bed/2.5 bath 1600 sq ft condo for 550k @3.75% interest rate, $315/mo hOA and $3205 Mello Roos/Year, $450/year Home Insurance and you rent it out for $2900/month and there are property managers who will keep 5% of yearly rental amount.

2. Since you are buying a new condo, repair costs can be kept at a bare minimum of $200/year.

3. With 20% down payment, your monthly mortgage inclusive of HOA+Tax+Mello+Insurance = $3200/year ==> you will end up paying 400$/mo approximate after renting and are looking at 8-10k/year negative on a yearly basis....but if you have a smart CPA, you will deduct 16k(interest)+9k (property tax) + HOA (3780) & Home Ins (450) = 29.5k ONLY for your home expenses and then even if you do standard deduction of 12,500 = 43k/year , you are looking at receiving 13-15k in returns...and in the bigger picture/longer run, you will NOT only OWN the condo BUT also build equity

Your numbers are off dude.  Trust me, it makes NOOOOO sense to rent the house.