February 9, 2004 Interesting Blurb from Richard Russell on simple formula for real estate investing.
Now I want to say something about real estate. My father was in real estate all his life. Dad was a civil engineer, and prior to the Depression he was a builder. He knew building from the foundations to the elevators to the roofs to the electrical systems.. Then the Depression hit, and construction stopped dead. Nobody built a damn thing — wait, the government built post offices and roads, mainly to give people jobs.
During the Depression and afterwards, my father went into management. He managed building for Tishman Co. and these were all New York City Apartment houses — many on Park Avenue. In those days, times were was so tough that you had to negotiate a lease on an apartment. In other words, you had to sit down with a prospective tenant, and try to get him to sign on the dotted line. Believe me, it wasn’t easy, and my dad would often come home exhausted after getting someone to signs a one-year lease.
My father had a “formula” that he used when buying a house, any house. He insisted, “No matter what you buy, figure it’s going to cost you 10 percent to carry. That includes loss of interest on your the money you put down, property taxes, wear-and-tear, repairs, extras — your cost will ALWAYS come to 10 percent.” I’ve checked these figures over and over again, and my father war correct. When you buy real estate, think 10 percent!
Today in the WSJ there’s a group (with pictures) of five houses that are listed as rental and income properties. The first house is typical. It’s in Sanibel, Florida, a two bedroom condo — price $1,150,000. The house rents for $39,000 for the year. OK, so the house cost you $115,000 to carry (10%), and you pull in $39,000. Loss $76,000.
Russell conclusion — This is an income property? It’s selling at near three times what it’s worth as an investment, in my opinion. And this is typical of almost all real estate today.
You want your own home and a roof over your head that you can call your own? Fine, buy a house, own a house. But if you think you’re getting a bargain today, forget it. Houses, like stocks, are overpriced. Period. The only economic reason to buy a house today is the thesis that inflation will bail you out. The only thing I don’t like about that reasoning is that the public has swallowed it hook, line and sinker. Too many people own homes today and far too many own them along with fat mortgages.