I’m not sure that we are near the bottom in the real estate market, but this post from Calculated Risk explains that in some parts of certain areas, the REO (real estate owned) sales prices are so far below similar properties in neighboring towns, that they might be near a bottom:
Interestingly, they point out that an investor in one of the houses mentioned, could realize a cap rate of about 7% if one were to invest because the rents were strong and the purchase price was down.
My point is, that if I am going to invest in real estate, my “required” rate of return would vary depending on the city I am in. For example, if I were buying in Cambridge, MA, I would settle for a 9%+ return on my invested equity to buy. If I were buying in a lower rated town, I would require a rate of return above 12% on my equity. How would I calculate this? Let’s be clear on the definition of terms – equity = my down payment. Therefore, return on equity (ROE) is what I keep after I pay everything. In other words, rental income – maintenance, taxes, and insurance and also after my mortgage payment if any.
In the Boston area, most properties are still too expensive to get ANY return on equity from rents, and that is part of the reason I think they will fall further. However, I don’t doubt that opportunities pop up here and there – but this is the time you have to work for your gains – this isn’t the easy money time we had in the recent past. You can still make money though, I think, if you are willing to do the work.
Chris Grande
5.21.08
