by Osman Parvez

Beware, the following article contains graphic descriptions of painful investment carnage. reader discretion is advised.

It was suggested that the little investment analysis at the end of my Superior Market update deserved its own post. So I took a little time to analyze it further.

Here’s we go …

1643 Egret Way has been on the market for 317 days (as of 9/09/06). It’s a 2 bedroom, 2 bath condo with a 1 car garage. Originally listed at $194,900, it hasn’t seen a single price reduction and yet the seller is described as “very motivated.”

Hmm…

On the listing sheet, it’s also described as “a great first time investment property.”

Given the length of time it’s been on the market, I first looked at this condo because I thought it might be a good candidate for a low offer. You’d be surprised how even the most stubborn sellers become more reasonable after their property has been on the market for 300+ days.

Then I looked at the ownership history.

The condo first sold in July of 2001 for $192,000. It sold again in September, 2003 for $189,500. That’s right, $2,500 less than three years earlier. Today the seller is asking $194,900 which represents less than 1% annual appreciation from the purchase price in 2003. Given inflation over the last few years has ranged from 2% to 3%, this property lost value (again). And that’s before paying real estate commissions.

Ouch!

Ok, what about cash flow?

In September, 2003 the national monthly average for 30 year fixed rate mortgages was 6.29%. If the owner put down 20% and qualified for the average rate, his mortgage payment would have been $937.37. Add on $199.00/month for HOA, $117/month for taxes (taxes are ~$1,400/year), and for easy math $50/month (600 per year) for insurance. Since even condos require some maintenance, throw in another $50/month. Add it all up and the carrying cost would have been $1,353.37 per month.

I don’t track the rental market, but I seriously doubt a 2BR, 2BA condo in Rock Creek is renting for $1,350 month. Perhaps $900 to $1000?

What about your tax savings and how did it compare to renting?

The interest on the mortgage is tax deductible (for primary and secondary residences). Using a mortgage calculator (i’ll check the math later), you would have run up $28,106 in interest payments in the first 3 years of ownership on a 6.29%, 30 year FRM with no points. If you’re at a 28% federal tax bracket plus Colorado’s income tax of 4.63%, you should be able to save $9,171 on your taxes over three years.*

Renting probably cost ~$350/month less than buying the property, so after three years (assuming no rent increases), buying was $12,600 more expensive than renting. Even offset by the tax savings, buying this property three years ago would have cost you $3,428 more.

So let’s see, this property appreciated at less than 1% per year which means it lost value (in real terms when you consider inflation of 2-3%). If you were a landlord renting it out, it probably didn’t cash flow costing you an additional $350/month. If you were living in it, you probably could have saved ~$3,500 by renting instead plus you skipped the headache of maintenance. You also haven’t been absorbing the time/cost (300+ days and counting) of trying to sell it.

Lesson? Don’t let anyone tell you that you can only make money in real estate. It’s not always the case, but from an investment perspective, this particular property was a lemon.

If you’re thinking about buying property, let this be a reminder for why it’s important to look into ownership history and market trends. And if the listing agent tells you it’s a “great investment,” be sure to double check the math.

Another thing to consider is holding period. As I mentioned to clients just the other day, 3 years is a short time. For investment purposes, I’d recommend holding for 5 years or longer. In the case of Superior, companies like Vail Resorts are also driving down the vacancy rate in nearby Interlocken. As more businesses take up residence, more workers may be looking for housing with a short commute. The rental market will probably improve in coming years.

We analyze the market and publish our monthly updates to help buyers make intelligent decisions about real estate. With average area appreciation rates, most properties haven’t performed as badly as 1643 Egret but it still pays to do your homework before investing. If you’d like to talk to us about your real estate investments, feel free to contact us at ph: 303.746.6896.

*assumes that you paid no points at closing for the mortgage, that you qualify for a home interest deduction, and that you itemize your taxes on schedule A of your Federal tax return. Total tax savings may be less for higher incomes that have their allowable itemized deductions phased out. Your total tax savings may also be reduced if you prepay your loan.

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