As of the completion of this blog post at 7am today, the Dow Jones is down around 2,000 points, again. This now takes the stock market down about 27% from its highs.
Financial news is talking about the needs for drastic action from the Federal government from a health and fiscal standpoint. I don’t know enough to know what is true in financial markets, but it seems that this will likely affect most businesses and most markets in some way.
In volatile times, it is tough to value companies unless you are absolutely sure of their income and expenses. The companies that have predictable revenues and a reliable and safe dividend can make it easier to see through the chaos and feel comfortable about value.
The same can be said with residential real estate.
If you are looking at a single-family home that depends on your income to service the mortgage, taxes, and insurance, then you need to be sure your income is stable and is here to stay.
In theory, all homes that have owners who can afford to pay are stable, but how can you really prove a value of a property?
The answer…predictable income and expenses that produce a profit.
In layman terms: What would the likely rent and expenses be? And, can you cash flow?
Hermosa Beach Condos
In the four markets I cover in the blog, I am going to zero in on Hermosa Beach condos that are not only some of the most affordable options on the market, but their income and expenses are very clear and offer a margin of safety.
These condo options are predictable and have more certainty because they can cash flow rather easily.
Let me show you an example…
- 1720 Ardmore Ave #223
- 2 bed, 2 bath, 857 sq. ft.
- Sold Price: $705,000
This is a very rentable two bedroom option west of Pacific Coast Highway with a huge market of well-off renters wanting to live in this desirable area.
Interest rates are also at all-time lows and very attractive. Assuming one puts down 25% and wants to preserve cash flow so you opt for an interest-only loan at 3.75% (you can pay down debt later, during more certain times which will come down the road).
These are your expenses on the Ardmore condo…
- Interest-Only Payment: $1,650/mo.
- HOA Payment: $491/mo.
- Property Taxes: $700/mo.
- Walls-In Insurance: $75/mo.
- Maintenance Reserve: $100/mo.
- Total Expenses: $3,061/mo.
Those are fixed expenses assuming the HOA is well run and the unit is in good condition where maintenance is normal, which there is no reason for me to believe otherwise.
So, what are the rents?
Well, this same unit rented about a week after closing. It came to market asking $3,300 a month and a week later nailed down a tenant for $3,200 a month. So, after taking the expenses from the monthly income, the owners are making about $200 a month in cash flow.
In crazy times, that will help you sleep at night if real estate prices were to dip in the short to medium term.
If we can’t depend on “affordable” Hermosa Beach two bedroom renters, then the overall economy has a problem where nothing is safe. The chances of it coming to a situation like that are one in a million.
This Ardmore condo is not a unique example.
There are plenty of sales in the Hermosa Valley sub-market at various prices. Take a look…
- 1600 Ardmore Ave #130
- 2 bed, 2 bath, 1,048 sq. ft.
- Sold Price: $683,000
- 1707 Pacific Coast Highway #215
- 2 bed, 2 bath, 977 sq. ft.
- Sold Price: $645,000
- 1707 Pacific Coast Highway #406
- 2 bed, 2 bath, 973 sq. ft.
- Sold Price: $640,000
In fact, there were nine, two bedroom sales in the last 12 months in these price ranges.
There are also ample two bedroom rental comparables. See below for some of the rent prices these owners got per month in the last two years…
- 1707 Pacific Coast Highway #310
- $3,400 per month in 2019
- 1600 Ardmore Avenue #222
- $3,100 per month in 2018
- 1600 Ardmore Avenue #209
- $3,100 per month in 2018
Pair the property closings above along with these rental comps, and all of these would cash-flow with 25% down and a 3.75% interest-only rate.
These are predictable, safe, and something you can take to the bank in tumultuous times.
I am confident that our country will “weather this storm” regardless if it is short or long term. And, we will come back stronger than ever.
That said, if you are nervous then stay on the sidelines.
If you want to put cash to work and sleep at night, then look to properties that will cash flow and have a huge market of desirable renters.
Hermosa Beach two bedroom condos work right now.
Take your time and be choosy on your deals.
But, most importantly, wash your hands, avoid large crowds, and stay healthy!