Buy It, Rent It

By Dave Fratello | February 27th, 2013

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Buy it or rent it? That's a conventional question.

Sometimes a property is offered both ways, and the consumer can make the choice.

Take 3521 Walnut (5br/4ba, 3250 sq. ft.), which sold for $1.435M just 14 months ago, and hit the market this year with big ambitions: a 30% markup to $1.850M.

It's down a little now to $1.769M, but they've got a backup plan. It's for rent at $7K/mo. (See the rental listing here.)

That poses a straightforward choice: Do you want to park at least $350K in a down payment and borrow $1.4M to take title, or maybe just hang around a while at $84K/yr.?

Now for another direction – buy it TO rent it.

That's going on around town here, too, and the numbers involved may surprise you.

Step back first, and we'll note that lots of housing markets around the US are being dominated by investors. Single-family homes in formerly depressed markets are being scooped up en masse and turned into rental properties.

Whole subdivisions meant to be owner-occupied suburban enclaves are, instead, turning into rental housing. Seems the investors' money came back before the first-time buyers' money did.

But Manhattan Beach? We had a substantial dip here post-bubble, but it's no depressed market. And yet you see investors parking cash, taking out low-rate loans and putting pricey properties out for lease.

2400 Palm (4br/5ba, 3100 sq. ft.) is a newer, custom, modern house on a terrific block in the Trees.

It listed in September at $1.975M and got bid up to $2.050M.

It was easy to see the appeal for a buyer – slick, newer home, great location. Why not pay more?

But the buyers didn't move in. They rented out 2400 Palm at $8K/mo. (As it happens, Dave placed clients in the rental.)

Tax records show the buyers put about 50% down on the $2M+ purchase, so you can kind of see how the numbers could work as a straight-up investment property.

Still, to see a $2M SFR switch instantly to a rental was a surprise at the time.

1406 Manhattan Ave. (3br/3ba, 2280 sq. ft.) sold quite recently, in early February, after a few months' run on the market late last year. 

Offered at $2.0M, it sold for a little less: $1.950M. (With the same agent representing seller and buyer.)

Now this one's up for rent, asking $9K/mo. (The rental is listed by the same agent, who got to recycle the photos and listing description. Convenient.)

As an investment, the promise or return on this one is less obvious.

Tax records show the buyer put 25% down and took a loan over $1.45M. Our quickie mortgage calculations show that could be notably cashflow positive (perhaps $1,500/mo. on a standard fixed-rate loan, much better with interest-only), though not profoundly so. Get it occupied quick or the vacancy factor eats up the positive dollars.

The hands-down shocker in this group is 2301 John.

This is a mid-century-modern inspired corner-lot home on a great block in the Trees, not more than a stone's throw from 2400 Palm.

It famously drew at least 15 offers before selling in a head-shaking auction for $1.880M. For a 4br/4ba, 2600 sq. ft. house that wants some modernization, that was a lot. The frenzy had led to an overbid of $331K over asking (which had been $1.519M). (See "Close the Books on 2301 John.")

But now it's for rent at the comparatively modest rate of $6,500/mo. (See the rental listing here.)

When this first came up for rent nearly 2 months ago, we simply assumed this would be a short-term rental until the new owners did what we all expected someone to do: Figure out a major remodel, get it permitted, and get to work.

But no. They're looking for a standard 1-year lease.

Here the tax records show a loan of $1.050M against the property, suggesting that the cashflow will cover the payments just fine. Is the return what you want on $875K? That's not our call to make.

Indeed, folks putting down $500K-$1M or more on their properties don't need our investment advice. Clearly they're satisfied with the return, and they're betting on the promise of a solid luxury market over the long term. No doubt, they see real estate as a more stable investment than a lot of other alternatives out there.

But this news is just what buyers don't need: The knowledge that in any given bidding war, they may be matched up against investors who simply plan to turn a house into a rental.

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