Tuesday, January 22, 2008
Math for Newspapers
by Ken Houghton
There are so many things wrong with these two paragraphs. Dr. Black trashes the first 'graf, so let's deal with the second.
"hard to keep a cash-flow property" doesn't even begin to cut it. If the mortgage is at 6.5%, your cost is just over $3,600*—three times the market rent. You're losing about $2,400 a month, before taxes and maintenance and any housing association fees. That's $30,000 a year in carrying costs.
Why don't you take the loss? Because, at 6.5%, the break-even sale price for a $1,200 month payment (1:1 rent equivalent, again excluding those other costs) is $189,000.
You need an interest rate of approximate 0.95% per year to be breaking even on $1,200 of income and a $500,000 exposure.
So the choice is: do you want to lose $30,000 a year, or between $250,000 and $310,000 upfront?
*All calculations on my HP12-C, rounded, based on monthly payments and a 30-year fixed rate mortgage.
Via Dr. Black, an article on Florida real estate and rentals gives us this blooper:
Most new condos, he said, were purchased to generate rental income.
"They're getting $1,200 a month in rent, tops," Painter said. "It's hard to keep a cash-flow property when you paid $500,000 and can only get $1,200 a month rent."
There are so many things wrong with these two paragraphs. Dr. Black trashes the first 'graf, so let's deal with the second.
"hard to keep a cash-flow property" doesn't even begin to cut it. If the mortgage is at 6.5%, your cost is just over $3,600*—three times the market rent. You're losing about $2,400 a month, before taxes and maintenance and any housing association fees. That's $30,000 a year in carrying costs.
Why don't you take the loss? Because, at 6.5%, the break-even sale price for a $1,200 month payment (1:1 rent equivalent, again excluding those other costs) is $189,000.
You need an interest rate of approximate 0.95% per year to be breaking even on $1,200 of income and a $500,000 exposure.
So the choice is: do you want to lose $30,000 a year, or between $250,000 and $310,000 upfront?
*All calculations on my HP12-C, rounded, based on monthly payments and a 30-year fixed rate mortgage.
Labels: Housing Bubble, mortgage
