Harrisonburg/Rockingham County Real Estate Issues
• Oct. 6, 2006 - Income Property
| A recent spreadsheet I ran on income producing property, specifically townhouses, in our market revealed some interesting facts. For my methodology, I took about a dozen townhouse offerings from our MLS and put them in a spreadsheet to examine potential cash flow and return on investment. For input, I used the price quoted in the MLS, the current rental where stated in the MLS, and the current association fees where stated in the MLS. I also used the current Harrisonburg tax rate of $0.62 per hundred dollars of assessed value with an assessed value estimated at 70% of list price. Of course, this is a generalization; some will be more, some less. I also allowed for computations based on different downpayment percentages, different interest percentages, different mortgage periods, and different percentage allowances for Repairs and Maintenance and Vacancies, I also factored in depreciation at 27.5 years and a personal tax rate of 25%. After factoring in the purchase price, several percentage downpayments, several interest rates, two months rent for R&M and vacancy, and allowing for tax savings for R&M, interest, and depreciation, I only came up with ROI's barely positive, i.e., in the 0-2 percent range. I tried changing the variables to other reasonable values with little change in results. The recent appreciation in townhome prices in our area due to housing demand has not caused a corresponding raise in rental rates. We currently have townhouses on the market in the $130K to $150K range that are renting for only $800 per month. If we consider the "down and dirty" evaluation by Market Capitalization Rates, a 10% capitalization rate makes these properties only worth $96,000! However, there are buyers in our market still buying these properties. My best guess is that they are betting on substantial raises in rental rates and/or significant appreciation in townhouse values to make the numbers work out. The former (rental rates) seems probable, but, given the current market, it may be risky to bet on the latter (price appreciation). If you email me at roger@roger4realty.com, I will email you the MS Excel Spreadsheet for the above as an attachment.
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