Now for a long while (over 6 years) I have been bearish on RE. For those who may not understand the term bearish, it pretty much means that I think that purchasing a property has NOT been a good move. But things are changing.
Take these homes for example.
Some things I know after researching the homes using DIAL and the CLERKS records are.
- They are both short sales
- They are right next to each other
- They were built for $106k in 1996.
- Annual tax is around $2k
Now how can we distinguish if this is a good deal? Well lets lay some ground work.
I currently rent a crappier home than either of these for $775 a month. So if my net monthly cost is less than $775 a month, this tells me that I should consider “buying” a home. So I go to bankrate.com and open up their mortgage calculator.
The homes are asking $89k, and I would put down roughly $20k in cash. Making the loan amount $69k. And with a 15 year fixed and good credit, you should be able to pull close to 4.5% on the interest. You can see that the monthly payment is then $527.85. This may lead you to think “Jared, you would be saving $250 dollars a month, what is stopping you?” and that is a reasonable question.
If you look up the properties in DIAL, you will see that the annual taxes due on the homes is roughly $2k. Dividing that by 12 gives you your monthly tax rate at $166 a month.
$527.85 + $166 = $693.85
Monthly Mortgage Payment + Monthly Tax Rate = $693.85
Which doesn’t look quite as attractive, but is still interesting. Finally you should calculate maintenance costs. Which most people say the bare minimum is 1% of the purchase price. Realistically, I think we probably should go with 2-3% of the purchase price for these older homes, but for the sake of this post, we will just use 1%. 1% of $89k is…$890 which we will divide by 12 to get our monthly maintenance cost. $74.16.
$527.85 + $166 + $71.16 = 765.01
Monthly Mortgage Payment + Monthly Tax Rate + Monthly Maintenance Cost = $765.01
Yes, this looks really attractive, but I also want to add the transaction cost (The amount you pay in fees to the RE agent, Mortgage broker). I will have to guess a little bit here, if a real estate agent can shed some light I would appreciate it. So lets say that the total fees paid, is roughly 7% of the purchase price.
$89k x .07 = $6230
Now divide $6230 by how many months you will have the mortgage loan for. In our case, it is 180 months.
$6230 / 180 months = $34.61
Keep in mind that if you roll any of the fees into the loan, then you will pay interest on them.
$527.85 + $166 + $71.16 + $34.61 = $799.62
Monthly Mortgage Payment + Monthly Tax Rate + Monthly Maintenance Cost + Monthly Transaction Cost = $799.62
This is the basic math I use to figure out if I really am getting a deal or not. The interesting thing here, is that an investor could potentially buy this place. I mean they could maybe rent it for $850. So they would make ($577.85 x 12) $6934.12 annually on a $89k purchase. Roughly 7% +/-. Not a terrible investment using this math.
I did call about these homes, supposedly they have several offers. Thing is, with over 400 Notice of Defaults in January, we all know that there is plenty of inventory. Meaning that there is absolutely no freakin rush to “buy” a home.
Anyway, just some thoughts for people to consider before they purchase and please comment if I missed something.