Dig Deep If You Want To Own A Home

The US Census Bureau released 2008 data on Monday that shows that housing is getting less affordable even though the country and the Bay Area have seen home price drop over the last year few years and continued to decline.

The numbers are staggering, with more than 40 million homeowners spent 30% or more of their household income on housing costs, an increase of 600,000 more families from 2007. The survey includes homeowners and renters and it revealed that there was an increase in renters in 2008. That should not be surprising since thousands have lost their homes to foreclosures and they still need a place to live. Many former homeowners have returned to renting this is reflected in a 142,000 drop in home ownership.

In the Bay Area, nearly half the renters and 53 percent of the homeowners spend more than 30 percent of their income on housing. Even with the high cost of housing, the Bay Area income is also higher. Places like California's Central Valley have higher numbers of renters spending a large portion of their household income on rent with Fresno at 57.2% and Modesto at 58.1%. Miami led the country of homeowners that spend 57.2%. Los Angeles followed closely behind at 55%.

According to the book "Housing America in the 1980s" by John S. Adams rent in the West was 22% in 1970 and 28% in 1980 of household income. Homeowners with mortgages in 1980 spent 19-20% of gross monthly income and houses without mortgages 10-15%.

San Francisco-Oakland-Fremont, CA
Renters spending 30% or more -- 49.5%
Homeowners spending 30% or more -- 53.0%
Renters spending 50% or more -- 25.1%
Homeowners spending 50% or more -- 23.4%

According to the USA Today Story that ran this morning:

Nearly two in five homeowners with mortgages and half of renters paid 30% or more of their before-tax income on housing costs, which is the limit the government sets for determining that housing is unaffordable, according to an analysis of Census data done for USA TODAY by the Joint Center for Housing Studies at Harvard University.

The basis for housing costs for homeowners include mortgage payments, taxes, insurance and utilities. Renter costs include rent and utilities, if they are paid separately.

Here in Alameda the August 2009 median home price of $505,500 require the following for a homeowner. (All numbers are estimated)

Down Payment (10%) -- $50,500
Mortgage (30 year) -- $2,442 month; $29,304
Taxes -- (Annual) -- $6,318
Insurance (Annual) -- $1,200
Utilities (Annual) -- $1,800

Total Annual Cost -- $38,622

The net income a household would need to be right at 30 percent level is $128,740. When you account for Federal (33%) and State (9.3%) taxes the gross household income needs to be well over $220,000.

These numbers are nothing new for those that live in California and in Alameda. We all know that it is a struggle to pay for a place to live and if you want to own your little piece of the Island you will have to dig deep into those pockets.

Time to Invest in Alameda Property?

So I was thinking is it time to invest in Alameda rental property because the last eight years it has been almost impossible to be cash flow positive buying investment property in the 94501/02.

A quick look at the Mason Management, Harbor Bay Realty Rentals and Gallagher and Lindsey Rentals websites showed that rents in Alameda range:

A one bedroom one bath rents from $800 to $1,200

A two bedroom one bath rents from $1,200 to $1,800

A quick search of Multi-Family properties and found 31 of them for sale. I was surprised to find 1514 Minturn listed for $380,000 for a duplex. $380,000! There are a lot of homes in this market that are NOT under $400,000. The Realtor for this property does not included the layout of the two units, but it is a Victorian that has a converted second unit so I am guessing that the two units are a three bedroom, one bath and a one bedroom, one bath. Another local blog Knife Catchers wrote this property back in October of 2008: 1514 Minturn Knife Catcher’s post.

The property sold for $720,000 in September of 2005 so this is a 52% reduction in that sale. Minturn is a foreclosure, and with the following assumptions the property could be cash flow positive pretty fast.

Purchase price: $380,000

20% Down Payment: $76,000

Interest Rate: 6%

Monthly Payment: $1,822

Other Expenses: 30% or $546

Total Expenses: $2,368

So if you can rent top unit, the estimated three bedroom for $1,600 (middle range for two bedrooms rental listings) and if the second unit is a one bedroom and it garners $800 then the revenue is $2,400 per month. This makes the property cash flow but is positive by a small margin. Lots of assumptions but it is worth a further look and working the numbers further.

There are two more duplexes, 613 Haight and 538 Palace Court, that are for sale under $500,000. Haight is a real fixer and I am guessing because the Realtor did not breakout the units, so one unit is 2-bed, 1.5-bath and the other unit is 1-bed, 1-bath. This property would take a lot of money to get it up running. Palace is has a lower unit that is 2-bed, 1-bath and the upper unit is 1-bed, 1-bath. Both of these properties would be tough to get cash flow right away.

At the higher end of investment property is $748,000 Colonial Revival four-plex at 2153 Clinton. According to Mason Management that has the listing, this is a well maintained property with its rental income potential of $54,000.00. That income verses the annual mortgage of $43,000 plus (30%) $16,000 in expenses makes the annual cost $59,000. So on the back of the envelop it will take a while to get positive, but not horrible if you can manage costs.

The most expensive investment property is 1179 Park Ave at $1,575,000. This 8-unit apartment complex close to Park Street is a big box complex with parking under the units. I will let you pencil it out if this is in your investment range.

To answer my own question: Investing in Alameda is becoming attractive again but as in anything in life you really need to understand the hidden costs (vacancy, eviction, maintenance), and the time you are willing to invest to understand income property. If prices decline much more in the coming year then it will be a good time to start building or adding to your portfolio mix.