From the first article.

“The builder has shrunk its house size from an average of 3,200 square feet during the housing boom to an average of 1,600 square feet in many markets today…”

I used to think 2400 sq ft was a big house. Talk about excess…

Those McMansions out in Lake Elsinore could make for good rental properties though.

Here is a must read blog post for any california resident:

http://globaleconomicanalysis.blogspot.com/2009/03/california-billions-in-hole-again.html

California’s economy in is such bad shape that Taylor’s office anticipates that residents’ combined personal income will be lower this year than it was last year, leading to fewer tax dollars for state coffers.

“I went as far back as 1950, and I could not find a situation in which personal income had actually declined in the state, so that’s a rather unusual event,” Taylor said at a news conference Friday.

Thanks for posting the link.  Mish has been right on about the CA time bomb for a while now.

Ohhh ... I’ve got a great idea, let’s raise taxes an average of $1,100 on California families during the same year that incomes are expected to decline for the first time in 60 years.  This state is run by reactionary idiots, with zero foresight.

We’ll continue to have this type of government as long as the rational, educated and producers are out voted by the unionist, so-called “victims” and fascist in California.

Those Riverside county deals are amazing. The cash-on-cash returns are very high, particularly when you consider how low returns are on other cashflow investments. If you are a cashflow investor, why make 2% in some money market account when you can make 24% on rental income? IMO, the very low interest rates and returns on other investments is going to help mop up the fallout from the foreclosure crisis because cashflow investors will flock to properties like these once they go cashflow positive.

California is set up nicely for it’s very own adverse feedback loop.

Well….

If you look at the same analysis per household and adjusted for inflation, you find income has dropped four of the past 10 years.  http://www.dof.ca.gov/HTML/FS_DATA/LatestEconData/documents/BBCAPR.XLS

Inflation and a rising population can hide a lot of other problems.

“My vague vocabulary often compels me to use the imprecise and expedient word when the exact word that expresses my idea exists, but I am too ignorant to identify it and too lazy to locate it. “

Two words “Shift F7” (assuming you are using Word).

I wonder, though, how big a problem vacancy and the ensuing dropping of rents is going to be going forward, particularly in locations far from jobs.

There is such a huge excess of housing inventory in every market (even manhattan!) that not only do you have to worry about rents dropping 30%, but also vacancy rates increasing wildly.

Well, I was a literature major, and I think you are a good writer.  You write clearly.  We all make small mistakes, and the nice thing about writing for a blog with comments enabled is that people are happy to point out any typos or punctuation errors!

I’ve learned a lot from your blog.  I watched the video of your presentation at Google and found you to be a clear speaker, as well.  I dislike it when it’s hard to find the point of a speech or an essay amidst all the verbiage and tangents.  You have a lot to say but it all relates to your thesis, which makes your writing/speech easy to understand.

The fringe markets will suffer the most. I would not recommend a property in San Jacinto or Hemet regardless of how good the price is (they are almost giving away houses there). The extreme fringes will have difficulties keeping tenants as rents drop in more desirable markets. Properties in Lake Elsinore will not have long-term vacancy problems, and the other deal Shevy has is in the heart of OC.

I was surprised when I dug into this topic.  Even in places like Detroit, rents haven’t gone down, and there is a gigantic vacancy rate.

During the housing price crash in LA in the early 1990s, rents went down less than 2%. 

See the data for yourself, http://data.bls.gov/PDQ/outside.jsp?survey=cu put in a metro area and select Rent of Primary Residence.

When I previously looked at SoCal rents and home prices, there was only a modest correlation.

I agree with you IR, most Americans are lousy writers and therefore medicore thinkers.  I blame our colleges.  I went to a private college, Caltech, where finals were either problem solving or term papers.  I wrote a lot of term papers, and that was on manual typewriters, before computers with spell checkers.  When I got to graduate school, I was horrified to see my new compatriots could not write because all their tests were multiple guess, no term papers and very little problem solving.  I’ve heard it said that microsoft powerpoint has made people dumb.  I think the switch to mulitple guess testing did more damage to America than al-Qaeda.

yes on appraisals….

We’re refinancing and we were lucky that the house just next door sold a month ago, so that gave us a solid number.

Then two more houses within a few blocks also sold, so again more fixed numbers.

However, our house has been “rebuilt”.  If you pull the “public records” it shows an 1800 sq foot home, but the house is 2700 now.

In the past, like during our post construction wrap up loan, all we needed were the pictures from the appraisal and all was well.  This time around the lender wanted copies of the permits.  Even though the house was finished almost 9 years ago and the tax rolls show the increased tax valuation.  Of course, this means that if we had not had valid permits by now we’d been caught.

But, no the lender wanted copies of the permits too.  Which we had so we’re covered.  But this tells you how paranoid the lenders are.

And this with around 40LTV and a reasonable (for today) neighborhood.  I think our area prices will settle at around 800K when it’s all said and done.  This is because of the “conforming jumbo” and because amazingly quite a few folks can come up with the 150K downpayment.

Larry -

Novamind stomps the crap out of Mindmanager.  I’ve been using Platinum since it came out and pro for two years before that.  There’s no comparison.  You owe it to yourself to give it a test drive.

www.novamind.com

My favorite style of writing is the “consciousness stream”.  Hunter S. Thompson, Jack Kerouac and so on.  These are what I’d call Row A writers.  You’re there.

Ray Bradbury was quite good in his eloquence and ability to create vistas in your mind.  This is what I’d call a mid orchestra row, row M, sort of vista.  You can take the whole orchestra and still hear individual instruments.

Then you got the technical/non fiction writer.  In this endeavor the ability to create LISTS helps a ton.  Create your thesis and keep decomposing it into chapter, sub sections until you get “stories”.

Read Dr. Thompson’s write up of the Vincent Black Shadow or his adventures with a racing italian bike and you’ll fall off the floor laughing. 

Read Kerouac’s On The Road and it’s breathless.  He wrote it all in one long speed trip on a single roll of paper.  It’s an awesome book.

Catch Stephen King and you’ll get one long story full of twists and turns.

I find that the ability to think logically, organize my thoughts into lists and then lay out a story with some care about style (staccato sentences, long asides, vernacular, academic juxtapositions, contrasts and the such) works well. 

It’s important to look at your written style to keep the reader entertained and engaged.

For example, it took me quite a while to digest the second half of Greenspan’s book.  Interesting stuff but the writing style is very dry.

OTOH, I can not put down a Tom Clancy book until I’m done, all 800 pages of it.

Useful site—thanks for the link (and the observations).

IR, grammar and spelling mistakes are a pet peeve of mine, and though you sometimes make them (and I’ve sometimes pointed them out), your mistakes are not frequent and are usually not serious, so at least armed with grammar & spellcheckers, I think you are quite a good writer.

IMHO, The Lake Elsinore house is a good price if your going to live in the house at $75/sf, but not likely a good rental investment. It’s out in the middle of nowhere—who will have the money to rent it?  What’s the vacancy rate and medium household income?  The estimated 1% repair cost ($150/month) is way too low for rental property (1% on a high end is okay to use but not on rural property.  On blown AC will cost $150 on a service call and whole AC of the HVAC (without duct work) in CA runs ~$4000.

IR, your doing a wonderful job on your housing analysis.  I find understandable truth with some misspelling much better than well written lies.

When one is not dealing with their own money, reality is not their issue.  Govt and many executives in large corporations are not dealing with their own money.  It’s the subjects’ or shareholders’ money that appropriated or spent on the leader’s pet project or self.

I’ve been reading your blog for years.

Not only is the subject matter interesting for an amateur economist, but it is written in a way that is laid out in a simple, direct and interesting manner.

The writers out there that capture my interest aren’t the ones with the best grammar or punctuation.  They are the ones with the best delivery, regardless of the subject matter.

Your delivery rocks and your English teachers should be proud.  After all, you probably have more readers than they ever had.

Rents can only go down so far because of cost of business - fees, taxes, insurance, repairs (big cost for older home), etc.  I friend keeps bring up $7000 houses in Detroit.  Yea, $7000 but what’s the cost to keep them habitable, especially on the low end when damages alone run up more expenses than the rents.  It’s cheaper to have it vacant than occupied by a bad tenant.

I will check it out. I haven’t looked at other mind mapping software products for several years now.

I started using MindManager back when version 6 just came out in late 2005. There are some limitations to the software that inhibit free thinking. For one, I would like to have multiple central topics and be able to arrange them into patterns. MindManager does not allow this. I would also like to put thoughts on the branches themselves. Sometimes the nature of the association is important and worth documenting. You can do it in MindManager with a callout, but it is inefficient.

I have stayed with MindManager because they are the market leader, and I knew they would support the product. I get concerned that other software companies may disappear or discontinue their product. However, if you think it is that much better, I will at least take another look. Thanks.

“I can not put down a Tom Clancy book until I’m done, all 800 pages of it.”

Really, I gave up on Clancy a long time ago because he got too verbose, I thought his editor should have taken a harder line with him to shorten his books.

Conforming jumbo is supposed to be temporary.  Any thoughts on what happens if it’s $147k.

Keeping people interested is a good writer one that adds fluff to the subject with way too many words without reaching the desired point of the subject is boring as hell.

IE: I lose interest if it takes too long to get to the message.

Many may say they want all the BS in between—I want the message.

Don’t change how you write you are an artist and trying to be more may take away from who you are.

People who want to pick you apart need their own blog. They are the boring ones—fwiw

That’s a good point, I’ve been investing in real estate for about 5 years now, primarily out of state for cash flow. I’ve found that newer properties are much better as investments.- Shevy

Newbie—- People live in Lake Elsinore, if you look at rental comps it is not unusual for a home of this type to rent well above rental parity $1700+. For a home that can potentially be purchased for $170,000 that’s prett good. In addition, because of the cost to develop in California it’s pretty close if not below today’s replacement value. Moreover, if you study the taxes, when certain bonds are paid off the return goes up even further. Pretty good compared to homes in OC that are renting for $1700 and selling for $400,000. I do not believe that todays interest rates will last forever and I also believe that if and when we pull out of this we may ver well be dealing with inflation issues. I cannot imagine how upset I would be with myself if I did not have some real estate exposure in my investment portfolio using fixed financing at circa 5- 6.5% to hedge against inflation.

An AV post in the forums lead me here.  Your blog kept me riveted and coming back.

I drove to UC Riverside last week and noticed that it took about 40 minutes (with no traffic). The house in Elsinore is about 3 miles farther. There are quite a few people at my work who commute these distances since they start work at 5:45am and leave at 2:30pm. They like living out in Riverside and Corona areas because they can afford it. I could not convince my wife of this (since she also works in OC), but it works for them.

Since I am concerned about the risks of being a landlord, could you estimate the return using a typical property management services company? Do you use any yourself?

Not yet Daniel, not yet.

http://www.newsweek.com/id/189232

Hi Granite—- First, yes, I currently use a property manager on all of my properties. Second, property management can be a flat fee of $50-$150/month or based upon a percentage of rent collected anywhere from 5%-10%.

  I do an in depth analysis of each property that I present to clients as a potential investment which for many clients will include property management fees, In addition, I show my clients how through cash flow investing they can eventually have their properties pay for the purchase of their new properties (not through cash out refi’s or equity withdraw). In addition, in many cases I can have a pre-screened tenant already lined up or living in the opportunities I present.
  A good property manager is extremely important.

I have found from past experience that a good property manager more than pays for themselves for a number of reasons.

  1) A good property manager normally brings a great tenant and keeps vacancy low, I have property managers that I use that have a new tenant the day after the old tenant moves out and I never even know there’s a vacancy.

  2) A good property manager will immediately assess and collect late fees, work with a property manager in Houston that a couple of years ago practically paid for themselves because the tenant was constantly 1 month behind and they did not hesitate to collect all of the late charges every month. When I have managed my own properties in the past I have been two nice and have gotten burned.

  If you want to contact me through my web site you can either call or email me and I can give you more detail regarding why I like using a property manager. I am currently screening the top 5 in Lake Elsinore and working out a discount for their fees, from my experience, the best property manager is most often not the most expensive, unlike a lot of other businesses.

  Second, property taxes, if you notice, the property taxes I use in my calculations are relatively high because the properties I typically recommend are newer, at least 1990 or newer and sometimes have bonds that need to be paid off. This works both ways. First, in the short term the property costs more and I account for this. However I favor long term investments for those that are using leverage and therefore I focus on areas that have bonds that will be paid off in 15 years or less. Some of these areas the bonds will be paid off in 7 years, even if rents stay the same the cashflow will increase $2000+ just based upon the extra tax being paid off.

There is not doubt that there is a huge portion of Orange County population that would never consider living in Riverside county in a million years. There’s another portion that would consider it, have done it, and absolutely hate it and curse the day they moved there. However, there are other portions of the population.

1) People that have retired and want a nice home and califironia weather (albeit hotter than OC), want to be close to family in Orange County, but want to pay less money. There are plenty.

2) Those that want a bigger nice home in Southern California and cannot afford OC but have jobs that make them plenty of money and allow them to live anywhere. Amazing the amount of sales reps responsible for all of Socal that a place like Elsinore makes perfect sense for.

3) There are those that are willing to do the drive, even and crazy hours.

bottom line, there are homes that are below replacement costs and cash flow well in areas most have not considered.

“When I got to graduate school, I was horrified to see my new compatriots could not write…”

Ah, graduate school… to get my master’s degree in engineering (large public university), I was required to take a writing class.  In that class - intended for graduate-level engineers - we spent significant time on subject-verb agreement and list parallelism.

“…all their tests were multiple guess…”

I’ve actually seen an even worse variation in an undergraduate physics class: online quiz, multiple choice, two tries allowed per question.  Some of the later quizzes at least required numeric answers (within ±1% of the actual value was considered correct).

Actually, I meant $417k.  However, this typo took me down another path.  The limit was last $147k in 1986.  If the limit stays at $417 indefinitely, the great majority of homes in the US will qualify by 2012.

IrvineRenter, if your work over the last two years hasn’t been your best, then when you’re “on”, must be like the Sistine Chapel of RE Blogs. I’ve kept my subscription to your blog because I learn something everytime. Your grammar isn’t a concern to me.

I will suggest that you remove the “gay pr0n” line from your post. Last thing you want is Google picking that up…even if a Dangling Participle sounds just like that. LMAO

Why the hell would anyone rent in Elsinore when they can rent in OC for the same money, regardless of the value of the property?

If you can afford $1700-1900 a month for rent in the IE you’re a moron if you don’t buy!  Plus, the area is loaded with excess houses.  I think the rental rate is overpriced.

When me moved from Chino Hills to Orange three years ago, one reason was Lewis Operating Corp ‘decided’ to raise our rent from $1675 to $2,685 to better reflect ‘market conditions’.  We left and saved ourselves three hours commute a day at a cost of $50 a month.  I see from thier website that they are asking $1,595 for the model match to our old unit today.

Hi No vaseline:
  You hit the nail on the head with this statement. “If you can afford $1700-1900 a month for rent in the IE you’re a moron if you don’t buy!” that’s what smart cash flow investors are looking for.

    Not sure what to say about the rest of your comments besides ask you to send me a 2500 square foot lease in Orange county built after 2000 on a 10,000 square foot lot that is leasing for under $2000 because I want to move in!

Seriously, it is not the heat, distance or whatever in Riverside County that is the problem. It is the crazy prices in Orange County. Prices out there are fairly normal. Here they are delusional. There is no tract home here worth almost a million dollars. You underestimate how many sensible Orange County refugees there are out there in Riverside County.

Well I am sure you have passed the test.

I’m not trolling you - but I must ask.

Is there really a rental market in the IE for a $2000 a month house? 

If somebody legitimately could afford two dimes a month in rent, they’d be a moron to do so because they can buy the house for less.

Is there really a pool of people that stupid in the IE?

Two good questions, 2500+ square feet homes for $1900/month+ rent is at the top end of the market rental market, the sweet spot is closer to 1600-2400 square feet and $1600/month-= $1800.

Typically I recommend smaller homes 1600- 2400 square feet for a number of reasons I will touch on only one in this post; there is a relatively large market for these types of homes. If you like I can send you the comps (available and leased), so that you can see the inventory and what has been leased. In addition, I will send you an absorbtion rate analysis if you like.

  A majority of the rental market of newer homes of this caliber, in this area are $1600-$1800. This is a good target area. You picked out the most important x factor in the equation, vacancy and rent rates. Those that have experienced other housing bubbles will attest to, just as in the bubble and even still today in many areas it was irrational for people to buy a home for $650,000 when they can rent it for $2125 (real life example in Irvine). It is irrational for someone to rent a home for $1800 when they can buy it for $160,000. However still many people do it. I’m not a psychologist but I do know that there’s something psychological that caused this behavior, those that do not follow the back tend to benefit. Ie. Not buying a home that rents for $2125 for $650,000 and by buying a home that rents for $1800 and sells for $160,000. Once properties are below rental parity with solid cash flow they make sense if one can keep vacancy low and rents stable.

IR - your writing is fine because you actually think about it. You probably have the following reference book handy, but if not, pick up Elements of Style by Strunk and White. Spend an hour with this book and your writing will improve. I return to “the little book” again and again, and every time I do, I can go back and look at something I have just written and see a way to improve it.
Thank you for IHB. I read it every day.