Cash flow analysis is a tool used by all real estate investors. It is a relatively simple formula, income compared to expenses basically. When looking at income, estimated vacancy rates are always deducted from the gross income estimate.
Since vacancy rates have gone way up in Mesquite, the reasoning behind considering vacancy rates is becoming very clear to many speculators.
As owners pull property off the market, and many are because they can’t or won’t lower the asking price, the supply in the rental market is increasing. Which brings us back to that darn supply and demand principle, as supply goes up and demand remains relatively stable, prices must come down.
However, many of the current owners are stubbornly saying “yeah right, I don’t think so.” Of course it’s their property and they are in charge.
Here is a common scenario; purchased in 2005 for $150,000 for speculation, placed back on the market at $269,900. After six or eight months of lowering the asking price it’s now down to $199,900, and still vacant. The sold comparables are coming in closer to $175,000.
In the mean time 6.5% interest cost, which is unavoidable regardless of the type of loan you have, it’s the cost of money, that’s around $820 per month, property taxes run around $125 per month, then there are HOA dues of $150, that’s around $1100 per month holding cost or $13,200 a year.
Cost of sale is going to average around 7 to 8%. So the $199,900 at 92% is $183,900 minus one year holding cost of $13,200 equals $170,700. But it’s not selling at this price.
The question is do we drop the price to $179,900, closer to what is actually selling, and try to break even.
Or hold it and hope it will go up and try to rent it, faced with wear and tear, negative cash flow and vacancy rates. What if the market goes down further, if so when will it come back?
Any lower price or longer wait and its going to be a real loss, cash out of pocket loss. For some the market has already passed this point.
So waiting is an option but it is not free.
Typically holding costs over an extended period are the unexpected enemy which wrecks the deal and are always a symptom of a slowing market.