Tuesday, January 22, 2008

Math for Newspapers

by Ken Houghton

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.

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