Sunday, February 25, 2007

The Bear Case-Part 2, some real data crunched

I had planned on continuing with some more abstract thoughts, but I came across the following interesting listings on craigslist:

For Sale
For Rent

We don't come across such gems for doing buy versus rent comparisons or to make a bull or bear case for real estate. This two bedroom condo is selling for $220,000. The same condo can be rented for $1100, all inclusive.

Old fashioned real estate value seekers would say that a good value for real estate is a property selling for 100 to 130 times monthly rent. In this case, the monthly rent, after excluding the condo fees is $758. Which means this property should be selling for no more than $100,000.

Or, the rent should really go in the $2000 range (plus condo fees). I'm not too sure how many people would be willing to (or able to) pay this much amount for this condo, at least in Edmonton. I think we still have not become Manhattan yet. May be if this mania continues for another15 years, but we are not there yet.

So by one metric, this property is severely overvalued. My guess is that this property was selling for around $120,000 less than two years ago- A time when sanity was still prevalent in Edmonton market place.

Let's take another metric-the Price to Earnings ratio for the property. Let's say you would buy this property as an 'investment' (as Realtors are so fond of saying).
What will be the earnings from this property? Assuming zero vacancy (not unreasonable to assume in the current Edmonton market, at least in the short term), the annual gross rent would be 13200 (1100*12) . The expenses are:

Condo Fees: $342*12= 4104
Property Tax: .01*220,000= 2200

We'll exclude any maintenance etc for this property for simplicity.
So the net income for the property would be : $6896

So for an investment of $220,000, the return will be $6896, making the P/E for this property around 32. Just for comparison, you can easily get 4% return risk free, hassle free from PC financial. If you take your $220,000 and put in that account, you'll get about $8800 in return.

So why would someone buy this property? Simple- in anticipation of double digit price increases.

Can anyone see the bubble yet?
blog comments powered by Disqus
Real Estate Blogs - Blog Top Sites