Irvine doesn’t have any great cashflow properties. Today’s is cashflow positive, but it is still have to believe in appreciation to pay these prices for small condos.
Address: 228 Orange Blossom 34 Irvine, CA 92618
Asking Price: $130,000
I’m givin’ up, on everything
Because you messed me up
Don’t know how much you
Screwed it up
You never listened
That’s just too bad
Because I’m moving on
I won’t forget
You were the one that was wrong
Forgotten — Avril Lavigne
Investment wisdom of yesteryear has been forgotten. People started drinking kool aid and convinced themselves they can make and spend a fortune through real estate appreciation alone. They were wrong. This mistake caused The Great Housing Bubble, and the result is foreclosure, ruined credit and even bankruptcy. Most have not learned this lesson yet.
Time to Payoff
When people examine investments, they often look at rates of return to compare between asset classes. Rates of return are a valuable metric. When thinking about retirement finance, rates of return become less important than steady cashflow. We need a new measure of success for reaching your retirement goals: Time to Payoff. The Time-to-Payoff is the amount of time it takes to retire the debt used to acquire the asset (house). It is a handy tool of those who use Accelerated Amortization.
Today, I want to look at another feature of cashflow investing: debt retirement. In Real Estate, Cashflow Investment and Retirement I noted, “… you can take the excess rent and put it toward the mortgage paying off the debt more quickly. Remember, the goal is to have maximum free cashflow in retirement, so you want to pay off those debts.” Retiring debt is part of the cashflow investment mindset; it is diametrically opposed to speculation.
Paying off debt is as difficult as dieting — there is always a temptation — whether it be spending or eating. The success rates for debt retirement are no better than they are for weight loss. Perhaps we should have a TV Show for the Biggest Saver.
Calculating Time-to-Payoff is a challenge. It requires looking at the available sources of cashflow and the impact the property has on its owner. There is a level of cashflow that can be diverted toward debt service that otherwise does not impact the owner’s life.
For example, if a property is about $600 per month cashflow positive before debt or taxes, the debt service payments can actually be closer to $900 per month before the owner is truly cashflow negative. How can this be? Isn’t paying out $300 a month more in payments making you cashflow negative? Not really. Part of that payment is equity that is paying down debt, so that is not a true expense. The interest will be tax deductible for most wage earners, so the owner can adjust paycheck withholdings to compensate for the difference in payment. In short, the property has no net financial impact on the owner.
If the property is cashflow positive — which it must be for this analysis to work — there will be money that can be put toward debt service. If the maximum available cashflow is put toward debt service, how quickly does the loan amortize? That is Time to Payoff.
If you invest in the Time-to-Payoff way, your property investments will have no impact on your financial life — plus or minus — until you retire. There is no demand on your income to service the investment, and there is no net benefit for you to spend on your lifestyle. Let’s just say, it isn’t a lifestyle alternative many people were choosing during The Great Housing Bubble.
IHB Investor Report
A few weeks ago, we introduced IHB Investor Reports. After reviewing the comments and some further reflection, we have updated our reports to include new features — one of which is the Time-to-Payoff calculation. Today’s featured property is as close to an investor property as I could find here in Irvine. The deal still isn’t very good unless you are betting on appreciation.
One of the changes we made was to run the report based on what we believe to be the most likely transaction price. It does nobody any good to run a report based on an asking price that is either WTF high or so low that you know 20 bids will be over the ask. The comps are what guide short-term pricing.
Another feature we added is a chart showing the impact of different downpayment and interest-rate scenarios. Rather than run multiple financing scenarios, I set up the spreadsheet to automatically run 165 of them and report the results in terms of cash-on-cash rates of return. What you will notice is that low downpayments and low interest rates increase returns at any given price. BTW, you don’t want to know how it is calculated…
Getting an IHB Fundamental Value Report
We are up and running and ready to serve. If you want to see an IHB Fundamental Value Report for either your own home or a house you are looking to purchase, you can request a report at our newest navigation stop: Reports. You will be automatically signed up for our introductory emails and our periodic newsletter when you request a report. In order to avoid responding to robot submissions, we will process your
request when we receive confirmation from your email address.
Asking Price: $130,000
Income Requirement: $23,927
Downpayment Needed: $26,000
Purchase Price: 62,500
Purchase Date: 10/29/1997
Net Gain (Loss): $59,700
Percent Change: 108.0%
Annual Appreciation: 9.1%
Monthly Payment $673
Monthly Cash Outlays $925
Monthly Cost of Ownership $653
Baths 1 bath
Size 471 sq ft
($276 / sq ft)
Lot Size n/a
Year Built 1976
Days on Market 359
Listing Updated 8/3/2009
MLS Number F1786080
Property Type Condominium, Residential
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Charming end unit. Lower level one bedroom with full bathroom and kitchen. Inside laundry. Living room and patio area overlooking water stream and soothing sounds of a waterfall. 1 car port. Association has pool, spa, tennis courts and clubhouse. Excellent location next door to Irvine Valley College. Near 5 and 405 Freeways, Irvine Spectrum Entertainment Center, Business District, Shopping. Located in Building # 12.