Emotion and Real Estate | Bay Area Real Estate Trends

Emotion always plays a part in the choice of a home to live in, and it should. To women it?s a nest, to men a castle.
My late Father in Law told me that he and his wife bought their first home because there was a beautiful willow tree in the front yard. He also told me it ended up needing a lot of work, that they overpaid and he never made that mistake again.
I asked him whether they were happy living there and he said yes. I am OK with that, they were happy. When you buy a home to live in you will likely be there a decade, maybe the rest of your life. If you fall in love with the willow tree or the tile mosaic of Elvis on the bathroom floor, great. And if you pay a little above market rate, fine. It?s a place to live,shelter.
When it comes to investing in Real Estate emotion is not your friend. And it doesn?t matter whether your are rehabbing and flipping, developing or buying rental properties for income. It?s about the cash flow. Only.
And unless you are honest with yourself about what the cash flow is you will get an expensive education.
I?ll write about rental properties because that?s what I know. I like single family homes and 18 or more unit properties and don?t much care for the in between stuff. One reason is that there are no real economies of scale.
The folks who give seminars and most agents talk about ?PITI? and ?Cash on Cash return? . That return is based on assumptions, one of which is that ?PITI? is a constant.
If you get a fixed rate loan your Principal and Interest are constants, but taxes and insurance are not. And this neat formula ignores Maintenance costs (Which can vary widely depending on the individual property), vacancy rates (and you will have turnover) and management costs.
Management firms usually charge the first month?s rent and the 8%-10% of each following month?s rent. That?s fair. If you plan to manage yourself, allocate that amount anyway to compensate you for the burden of management.
Then figure your Cash on Cash Return. I use an old rule of thumb, I simply look at the Cash on Cash return using PITI and cut it in half. It?s crude, but accurate enough to use as a sorting tool , much like Gross Rental Multipliers.

Macro

About Tom Stone

I am a Broker Associate and Notary public with Creative Property services (CPS) in Sebastopol Ca. My father was an Appraiser and expert witness based in Oakland Ca for many years and I grew up having the basics drilled into me. I enjoy what I do and I am good at it. I managed income property in Oakland for a number of years and was licensed to run a collection agency for more than a decade. I have also worked as a credit manager and as the senior collector at the test center of a Bank . I have been commenting for years at "Calculated Risk" and on other Real estate Blogs including the defunct "Sonoma Housing Bubble" Blog. The best job title I ever had was "Chief Garbler". My Email Address is "StoneForHomes@Gmail.com" and my cell # is (707) 364-2477, please don't call before 7 AM or after 8 PM unless we have a deal in progress.

View all posts by Tom Stone ?

Source: http://bayarearealestatetrends.com/2012/09/10/emotion-and-real-estate/

Garrett Reid shawn johnson Tony Sly Lauren Perdue tagged weather radar Heptathlon