The Cash Value of Real Estate Explained

With an understanding of the relationship between mortgage interest rates, capitalization rates and market rents, the cash value of real estate can be readily calculated. Today, I show you how.

Irvine Home Address … 1 WINTERSWEET Way Irvine, CA 92612

Resale Home Price …… $1,188,000


I wanna be a billionaire so fricking bad

Buy all of the things I never had

Uh, I wanna be on the cover of Forbes magazine

Smiling next to Oprah and the Queen

I swear the world better prepare

For when I’m a billionaire

Travie McCoy — Billionaire

Most people purchase real estate in California because they believe they will get rich. Few want to spend money to provide a home for their family as most expect their home to provide money for the family. Houses are the new wage earners, not through rental cashflow but through appreciation. Life doesn't work that way. Real estate can be a profitable cashflow investment, and it can make people rich — not through speculation on buying and selling, but through owning for positive cashflow.

Cash value of real property

Establishing the cash value of real property requires an understanding of risk and relative rates of investment return. Today, we will review these basics and apply a little simple math to show how to value real estate based on its cashflow value.

Cashflow investment is very different than speculation. The value obtained from owning a cashflow investment does not come from the change in the assets resale price; the value comes from the cash the investment provides while it is owned. In contrast, a speculative investment derives its value from the change in resale price that presumably goes up. Sometimes speculative investments provide cashflow, but in the case of California real estate, speculative investments often have a strongly negative cashflow because people over pay and over leverage themselves in order to speculate.

Since a cashflow investment relies on positive cashflow to derive value, the investment is best analyzed with an assumed permanent holding period. Appreciation or depreciation is not considered as it is not important to the investment's performance. Potential changes in asset value may be important if the investor needs to liquidate for other reasons, but a resale value at a later date is not a major consideration in analyzing the investment.

Also, since a cashflow investment needs positive cashflow to warrant consideration, the investment must perform immediately upon purchase. Once cashflow investors begin projecting future increases in rents to justify a purchase price, they are entering the fantasy world of speculation and failing to make a wise cashflow investment decision. Nearly everyone in California looks at property in this foolish way.

To properly analyze a rental real estate investment, the property must provide a minimum return in the first year of ownership without regard to future resale value. If rosy projections of the future occur, that is a bonus; if they don't the investment is still likely to perform as planned. That is low-risk investing.

Equity and Debt

If you analyze nearly any property in coastal California, the capitalization rate (the measure of cash return) is very low, generally between 3% and 4%. With mortgage interest rates at 5%, such low capitalization rates are unwarranted. Why would anyone want to earn 3% in an equity position when they could invest in mortgage debt an earn 5%? Most do this because they expect rapid appreciation.

Equity should trade at a premium to debt. Just as a second mortgage carries a higher interest rate than a first mortgage, equity should carry a higher cap rate than debt because equity is a subordinate claim to real estate. Landlords must pay the mortgage before they pay themselves. If the mortgage is greater than the rent, the landlord loses money. Similarly, if the landlord sells a rental property, the debt is paid first, and any remainder is paid to the landlord. Given the subordinate position and the associated risk, smart equity demands a premium for subordination. One of the surest signs of overvalued real estate is cap rates that are lower than mortgage interest rates.

Of course, California speculators do not see it this way. Fools believe prices rise very quickly and go up forever, and they see debt as a tool that positions them to capture this appreciation. It works well during market rallies, but it is devastating when prices crumble — and prices do crumble because appreciation in excess of wage growth is not sustainable. Speculators chasing the dream of appreciation pay too much for real estate, and in doing so, they push cap rates down well below the cost of debt.

Advantages of equity

There are two main advantages of taking an equity position in real estate versus a debt position:

  1. Equity returns are perpetual because it is ownership. Debt can be paid off and retired whereas equity can be kept forever and passed on through multiple generations.
  2. Equity returns rise as rents increase with wage inflation whereas prudent debt is fixed. Adjustable rate debt may go up or down with interest rates, but it will never see steady growth like an equity position.

California speculators believe these advantages warrant paying a large premium to own real estate; however, overpaying for real estate reduces the return and negates much of the advantage of ownership. Premiums are not infinite.

The equity premium

When I say that equity carries a premium to debt, it is easy to get confused about what that means for pricing. For capitalization rates to exceed the cost of debt, prices must be low. Obtaining an equity premium means paying less for a property, not paying more. The relationship between the amount invested and the return on that investment is inverse; In other words, the more you pay, the worse your return and the lower your cap rate.

As a general rule, equity should trade at a 20% to 40% premium to debt. For instance, at 5% interest rates, capitalization rates should be between 6% and 7%:

5% x 120% = 6%

5% x 140% = 7%

Last week I profiled a cashflow property in Corona. The capitalization rate exceeded the mortgage interest rate and fell within the parameters listed above. That property is an excellent cashflow investment.

Cash value of real estate based on mortgage interest rates and monthly rent

Based on the relationship between debt and equity explained above, it is possible to produce a simple spreadsheet that relates mortgage interest rates and monthly debt to arrive at a properties cashflow value.

The table below is loaded with information. The two assumptions are the expense ratio which is how much of the income goes toward taxes, insurance, upkeep, and other expenses, and the other assumption is the equity premium I described above.

The first four lines show the calculation of net operating income from monthly rent. I have selected rents showing a range typical across properties here in Irvine. The columns to the right show the capitalization rate based on the mortgage rate as I described above.

The table itself shows the resulting cashflow value when you divide net operating income by the capitalization rate.

I imagine many who view these numbers in Irvine think they are rather quaint but completely meaningless. However, when you look at properties where values are not inflated — like the property in Corona — the numbers illustrate a basic truth about bottoming values in a real estate market. Once the equity premium over debt reaches a viable threshold, money is attracted to a market and prices are stabilized. Large swaths of Riverside County, most of Las Vegas, and much of the Phoenix markets are at prices consistent with positive cashflow valuations. In short, they are as cheap as they need to be for cashflow investors to come in an clean up the mess.

This doesn't mean we are at the bottom in some of these markets because the huge supply of current and future foreclosures will continue to put pressure on prices, but cashflow investors will buy anyway because to them, if prices fall more, it is more reason to buy. Cashflow opportunities as good as what is currently available in Las Vegas are very rare, and cashflow investors are buying everything available.

I am very bullish on Las Vegas, not because prices will rise any time soon, but because prices are very attractive on a cashflow basis.

Today's featured property

Today's featured property clearly illustrates how clueless speculators are to cashflow values here in Irvine. The property is being marketed as a cashflow property. It is occupied by 6 students.

First, I believe marketing this property as a multi-family property in a single family neighborhood is against code, and since this property is in my neighborhood, I plan to forward this listing to code enforcement and see if they will do something about it.

Second, for this property to be worth almost $1.2M, these six students must be paying a combined $12,000 a month rent. I would be surprised if they pay half that amount. It would take a very foolish investor to pay double the cashflow value for a property that is not zoned for the occupation necessary to obtain the value. On a cashflow basis, this property is not worth what the owner paid for it, yet this guy plans to make almost $500K. If buyers in Irvine are that stupid, everyone should quit their jobs and start doing illegal rental conversions.

This is one of the dumbest ideas I have seen. Perhaps the guys who remodeled the monstrosity at 2 Angell can go this route to get out from under their albatross. If this guy gets $1.2M, anything is possible.

Irvine Home Address … 1 WINTERSWEET Way Irvine, CA 92612

Resale Home Price … $1,188,000

Home Purchase Price … $700,000

Home Purchase Date …. 4/25/2009

Net Gain (Loss) ………. $416,720

Percent Change ………. 69.7%

Annual Appreciation … 49.8%

Cost of Ownership


$1,188,000 ………. Asking Price

$237,600 ………. 20% Down Conventional

5.07% …………… Mortgage Interest Rate

$950,400 ………. 30-Year Mortgage

$247,951 ………. Income Requirement

$5,143 ………. Monthly Mortgage Payment

$1030 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$99 ………. Homeowners Insurance

$180 ………. Homeowners Association Fees


$6,451 ………. Monthly Cash Outlays

-$1413 ………. Tax Savings (% of Interest and Property Tax)

-$1127 ………. Equity Hidden in Payment

$471 ………. Lost Income to Down Payment (net of taxes)

$149 ………. Maintenance and Replacement Reserves


$4,531 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$11,880 ………. Furnishing and Move In @1%

$11,880 ………. Closing Costs @1%

$9,504 ………… Interest Points @1% of Loan

$237,600 ………. Down Payment


$270,864 ………. Total Cash Costs

$69,400 ………… Emergency Cash Reserves


$340,264 ………. Total Savings Needed

Property Details for 1 WINTERSWEET Way Irvine, CA 92612


Beds: 4

Baths: 2 full 1 part baths

Home size: 2,500 sq ft

($475 / sq ft)

Lot Size: 3,840 sq ft

Year Built: 1966

Days on Market: 15

Listing Updated: 40291

MLS Number: H10044068

Property Type: Single Family, Residential

Tract: Shdc


6 suites fully rented to UCI students. Beautiful home in the heart of Irvine University Park is surrounded by acres of parks, trees, and greenbelt – a tremendous health benefit for residents. Corner lot in a cul-de-sac. Total living area 3327 sq ft. profile only shows 2500 sq ft. Previous owner added 549 sq ft and current owner added 278 sq ft (both has permits please verify with city). Major remolded on 2008 likes new house. Owner occupy or investment.

65 thoughts on “The Cash Value of Real Estate Explained

  1. Freetrader

    Hell, that’s my neighborhood also (and so is 2 Angell, of course). I love the way they advertise that they have broken up a 2 bath townhome into 6 “suites”. Just what the area needs; a fraternity next door.

    Those University Park townhomes are pretty ugly to look at; but they seem reasonably big and comfortable on the inside. But I can’t believe someone actually paid $700,000 for one.

    1. wheresthebeef

      I would be really mad if I lived in this neighborhood. Places like this are never good for a good, stable community. You could get a frat house, sober living facility, sex offender safe haven, illegal alien clown house. You are going to have continous turnover and 10 cars parked out front. No thanks. I’m surprised the Irvine gestapo actually allows this.

    2. nefron

      How about $658,000? Two of this same model, same street even, went for that price in the past year.

  2. Planet Reality

    There is a ton of risk in the outlying areas. Anyone who has been to a part of the US that is in decline knows this. The outlying areas could be Compton / Watts equivalents in 10 years, with a longer commute !!! Cash flow is not eliminating the future risk.

  3. Planet Reality

    “Once the equity premium over debt reaches a viable threshold, money is attracted to a market and prices are stabilized.”

    Are you trying to say that money is not attracted to Irvine? If you are, I will argue correctly that money has more attraction to Irvine than the outlying areas. Should we infer that prices have stabilized in Irvine at fundamental DTI ratios and rental parity?

    1. IrvineRenter

      I would argue that dumb money has been attracted to Irvine because a false belief in price stability due to Irvine’s desirability. Prices in Irvine have not stabilized at fundamental DTI ratios and rental parity, and in fact, prices in Irvine are still elevated by historic norms. Prices are at the high margin of affordability and sustained there by constricted supply. The valuations based on cashflows are a joke in Irvine, so anyone “investing” here is really speculating, and they are doing so based on residual kool aid intoxication from the bubble. In short, dumb money buys in Irvine for its investment potential, and smart money is investing in the beaten down subprime areas for its superior cashflow.

      1. Planet Reality

        That’s funny because you recently had a chart showing that Irvine is back at fundamental DTI. You have also admitted that you can buy in Irvine at rental parity.

        Do you understand that cash flow is still speculating on the future of an area? There are endless examples in America that illustrate this. You are speculating on what the area will be like in 10-20 years. If the area has 20-40% vacancies and high crime cash flow today is meaningless.

        1. IrvineRenter

          No, I showed a chart that showed Irvine is at the tippy-top of the fundamental DTI range which is higher than its typical bottoming value. Also, the fact that some low-end properties are at rental parity does not mean the market is. These low end properties should trade below rental parity. Prices are still inflated.

          Your statements about the bogey man in fringe areas is rather silly.

          1. Planet Reality

            Silly? Tell that to anyone who has invested in an area that has become a ghetto or ghost town.

        2. lowrydr310

          Any decent properties in Las Vegas are being snatched up by all-cash investors/speculators, leaving someone wanting to buy a home to live in, using a loan to purchase, out to dry.

          I wonder about this effect you mention; what’s going to happen in these LV communities with high crime and high vacancy?

      2. awgee

        The smartt money, John Paulson, George Soros, John Tudor Jones, David Einhorn, Jim Rogers, Mark Faber, are in gold.

        1. awgee

          Let me try that again.

          The smart money, John Paulson, George Soros, John Tudor Jones, David Einhorn, Jim Rogers, Mark Faber, is in gold.

          1. Tyler D.

            selling gold, awgee? we’re heading for deflation, so…no thanks. U.S. is doing nothing different than Japan 20 years ago…or what went on here 80 years ago, so…

          2. matt138

            We will see deflation when pricing things in gold and inflation when pricing things in US dollars.

          3. muzie

            How about pricing things in stuff I actually use and give a shit about.

            Not a single person’s quality of life will be affected if things are priced higher in gold, except the guys from the bear community pop culture that are supposedly “smart”.

            Price your inflation in oil, land, or other tangible assets that are components of the CPI. Gold is too tiny a market, too easily manipulated, to provide any reliable measure of inflation.

  4. AZDavidPhx

    Oh the current owner added 278 $quare feet of pure awe$omene$$ – that explain$ why the property appreciated $o much.

    Someone just needs to buy this hotel and add a new wing.

    Keep the music going, somebody.

  5. Geotpf

    I believe it is not illegal to rent out a room in your house, at least in California. Taking that to the extreme, it is not illegal to rent out all of the rooms in your house. I believe there was a court ruling on this, but I’m not positive. Now, it is definitely illegal to convert a single family house into a multiple unit property (with more than one full kitchen, multiple addresses, and multiple entrances) without permits and other government approval. But that’s not the situation here.

    Does anybody with legal knowledge know for sure the legalities of this?

  6. Laura Louzader

    Do you have “boarding house” restrictions and occupancy codes?

    Many communities restrict how many unrelated people can live in one dwelling, to keep situations like this from happening, which is why many people in many communities and condo developments find that they cannot turn their places into, say, Bed & Breakfast establishments, or rent spare rooms out strangers to help make the monthly nut. Irvine clearly doesn’t have a rule forbidding a house from being turned into a “boarding house”.

    You are correct to angry at this situation, because too much of this wrecks a single-family home neighborhood.

  7. Stock Investor

    IrvineRenter: “Cashflow investment is very different than speculation.”

    1. Past cashflow does not guarantee future cashflow. Just like resale price.

    2. Cashflow is simply different way to extract value from property. So both cashflow and resale price are affected by change of value.

    3. “Cashflow vs value” is not something specific to real estate investing. For example, “bonds vs stocks” is quite similar.

    1. Planet Reality

      There’s a laundry list of cities accross the US where at one time they were cash flow positive and now are close to worthless. You are most certainly speculating on the future of an area.

      1. matt138

        It is a good idea to choose a place with diverse industry. I would argue OC/LA has that and people will commute. So now we are speculating the price of GAS does not go ballistic.

  8. nefron

    Note that this is a 4/2 1/2 being advertised as a 6-suite house, which implies 6 bedroom-bathroom combinations. Probably most of the UP contingent here has been in this model. In order to get 6 “suites” out of this house they probably cut the master bedroom in two and did something funky with the two second floor front bedrooms. Note how this is the version of this model that has the front patios for those bedrooms enclosed. I’d love to get in there and see what they did to claim they’ve got six “suites” in this house. The standard model has two bathrooms upstairs and a 1/2 bath downstairs.

    What a joke. Last spring this same model in an admittedly worse location went for $505,000 in a flip, and a second one next to the freeway went for $455,000 in a short sale. My how prices have risen.

    1. Geotpf

      The listing claims that there are two permited additions that are not reflected on the tax rolls, which is possible. So it might really have six bedrooms.

      1. nefron

        Oh, didn’t look. If this place ever has an open house I’m going to be first in line to see it. I will not argue if the listing agent says the additions are permitted, but I would like to see them myself. The lots in this area are small and, while I don’t know for certain about this section of UP, in other parts of UP and other neighborhoods, the city doesn’t allow the footprint of the house to exceed 50% of the lot. I would like to see how they accomplishsed that, since the model is pretty much a box, no first story roof to just build on top of. Maybe since it’s on a corner there is sufficient room to add on in the back or something. Probably the additional 27x sq feet of space is enclosure of the front porches on the second floor, since the model is generally listed as 1896 sq ft when the porches aren’t incorporated into the bedrooms.

    2. Alan

      The house I lived in as a student in Palo Alto had an extra bedroom built into the garage, 2 bathrooms, 1 kitchen and a living room, shared between 6 students. (One bedroom had a couple living in it.) That worked out ok … as a student. Almost certainly was not according to permits and code, but it was tolerated. In fact, as I recall there was a ghost family listed as living there, so that they could send their kid to the PA schools. Maybe that’s a way to get some extra rent money without needing an extra “suite”.

  9. lazyDog

    You say that you are bullish on the Las Vegas market. I do have to ask, lacking any data, what are the vacancy rates like out there? Isn’t there a risk that they are so overbuilt that an investor will only find renters with great difficulty?

    In the extreme case, one only needs to look at Detroit.

    1. Planet Reality

      You sound Silly. According to Irvine Renter if it’s cash flow positive now there is no need to worry about vacancy rates 10 years from now, gang infestations, or the downward spiral of immediate area jobs moving elsewhere.

    2. IrvineRenter

      Las Vegas is not Detroit. There are undesirable areas that people should avoid in Las Vegas like any market. Unless you believe people are going to lose their desire to gamble, Las Vegas is going to recover and prosper.

      Finding renters for any but the least desirable properties is simply a matter of price. For a time, it may prove difficult to find renters at the price you want, but unless you are renting the worst property in the hood, you can find renters by lowering the price.

      Vacancy does not tend to be a problem in Las Vegas. People generally don’t leave Las Vegas for greener pastures. Many people leave because they can’t control their gambling, but few leave because of lack of opportunity.

      Las Vegas was overbuilt during the bubble, but Las Vegas has also shown above average employment and population growth for decades, and I am of the opinion this will continue as long as people gamble.

        1. avobserver


          If you are correct that cash flow investors are more likely betting on the future state of an area than its current state, then what makes you so certain about the invincibility of the future of Irvine? It is true that many fringe areas may deteriorate and turn into ghettos in the future, but the potential risk of a degradation of fringe market is more apparent and should be factored in by any knowledgeable investors and reflected in housing prices in those areas.

          The risk of adverse future changes is far more likely underestimated in “prime” areas where inductive fallacy dominates the general view. People at the center of the action today believe the good fortune will perpetuate. Housing prices in prime areas tend to be priced to perfection without any wiggle room for changes. For Irvine to sustain its high premium all of the existing key supporting factors must extend forever into future:

          1. Remain the job center in OC
          2. Quality of Irvine school maintains its top ranking
          3. Continue to attract rich foreign cash buyers
          4. Income and employment opportunities grow at steady pace even as California economy as a whole is undergoing a steady decline and the state is going broke
          5. Current employers will not migrate to other areas (or out of state) even when the cost of doing business here continue to rise
          6. Interest rates will stay low and rent do not decline

          People living in prime locations are generally more complacent about market forces that could reshape the RE condition in their areas. The tendency to downplay any potential risk and project ever rosier picture into the future is epidemic. I am sure there were many pristine suburban places around Detroit, that at one time were considered by their locals as the best place to live – look, we have GM! The largest and most prosperous company in the world, and one income can support a family of four, a big house, two cars and three pets.

          As long as the typical buyer in Irvine still has to work for a living, there is no escape from the possibility of a bleaker future for Irvine housing market.

          1. Planet Reality

            My point was that Irvine Renter was inherently speculating whether he wants to admit it or not.

            People buy in Irvine because they feel assured that Irvine will be the same or better 10 years from now.

            Are you confident that Corona will be the same or better 10 years from now?

            Both are speculation, what do you think is more likely?

            Rents are largely dictated by jobs within a 20 minute
            commute. How confident can you be on rentals in Corona?

            In regards to Las Vegas how confident are you that future generations will have the same appetite for gambling and
            gamble in Las Vegas? That’s speculative, and based on current trends of how people consume entertainment I’m not sure it is very good speculation.

          2. avobserver

            While I am less confident that Corona will be the same or better 10 years from now, I am MORE confident that any downward risk has been more realistically priced into housing market in Corona.

            And while I am more confident that Irvine will be the same or better 10 years from now, I am far less confident that the downward risk (albeit at a lower probability than Corona) is properly factored into Irvine housing market.

            My point is Irvine speculators will more likely get burned by their complacency than Corona speculators. It’s human nature to narrowly focus on the past and present record and conveniently draw an imaginary “trend line” into the future, all the while ignoring the subtle changes of other variables.

            As for rents – I never thought Irvine and Corona make a good comparison. Irvine and an adjacent city, say Aliso Viejo, give a better illustration of substitution effect. I live in AV and work in Irvine, it takes me 25-30 minutes to get to work. But if one day HWY 73 is finally paid off and ceases to be a toll road, my commute time will be cut down to 10 minutes. It would actually take me less time to get to work from AV than some place within Irvine like North Park. So if that happens the Irvine “premium” associated with commute will instantly disappear.

          3. Planet Reality

            People are always speculating on the future. That is my point, and Irvine renter is speculating.

            I fully understand that someone buying in Irvine is speculating on Irvine’s future.

            If Irvine’s future is better and has a better probability for long term success that definintely impacts valuations and market pricing. That is investing 101. It’s not cash flows, it’s the probability and confidence of future cash flows that sets pricing.

            I’m shocked that 40 minutes of your time is not worth $12. You may need to re-evaluate your decision or employment.

          4. bltserv

            Just think if the Yuan was allowed to float free.
            That would dust some of those Irvine Prices.
            And FYI. The IAC is still lowering rents. Mine is down almost 30% in 3 years. Now the “Incentives” have been pulled by the government as well. The probability and confidence of a V shaped Real Estate is less than ZERO. Maybe in 10-15 years.
            Or just wait for the big ugly Inflation Monster to really ruin your day. The price will go up but your money will be worthless as well.

          5. avobserver

            Thanks to book on tape (CD) that extra 30 minutes are well spent. So I don’t feel the need to re-evaluate my decision just yet.

            But fact remains that while we are talking about the “probability” of a better future of Irvine being relatively high, the price of Irvine RE market seems to have priced in a “certainty”.

          6. RealityCheck

            “People buy in Irvine because they feel assured that Irvine will be the same or better 10 years from now.”

            Ahahahaha. This whole place was farms and ranch land 30 years ago. My wife remembers rolling up the windows on the way to San Diego as a kid because it smelled so bad. As for the current state of Housingpricesarenevergoingtofallville, her’s my take:

            My company moved out of state several years ago because the taxes were too high. They’ve layed off 75% of my department, and we’re doing better than all the other departments in this branch. They recently moved me out of Irvine into an office in a near by town because it is cheaper than renting in Irvine. We’ve closed 3 of our 4 buildings in Irvine, and the other 3 in our complex are vacent. Who would have thought that 3 morgage companies wouldn’t have made it through the bubble. Oh, and my neighbor told me the other day that there’s a section of Irvine where the kids have to go to school in Tustin.

            Meanwhile, back at the Hall of Justice, I’ve seen nothing but cop cars at my Housingpricesarenevergoingtofallville apartment, responding to domestic violence, homeless in the trash cans, car break ins and evictions. A good 25% of the complex is vacent if my building is an accurate representation of the rest of it.

            So explain to me what selling points are again? Because if you’re going to say the weather, then I ask how are you going to enjoy that weather if you are locked up in your shiny new box all day because your yard isn’t big enough to install even a horseshoe pit, not that your HOA would allow it (too much noise or you pained the horseshoes the wrong shade of silver). But you keep selling yourself that line from above, and smelling your neighbor’s farts everytime he bends over to take a crap, and in 10 years maybe you’ll come to the inevitable conclusion that we already live in Corona.

          7. matt138

            the vegas overbuilt argument crossed my mind but…

            Vegas will be fine because the Asians gamble. Servant sector jobs will abound.

          8. irvine_home_owner


            So you would rather live in Corona? Or where?

            Everyone has their druthers… Irvine happens to be a popular one (except for the comments section of the IHB).

          9. RealityCheck

            The East Coast my man. Connecticut, country ouside of Hartford. About equi-distant to NYC and Boston, which btw is about the same traveling time to get to LA or San Diego from here. It only took my wife one trip in the middle of winter to agree to abandon ship on CA. OK, gotta get back to work while I’m still a fortunate one with a job. Ever notice how many people you know that work in realestate? Maybe, just perhaps, they were all selling houses to each other, driving up the prices and laughing at their fake profits. I hope they all caught knives.

          10. tacoshark

            NEWSFLASH – It takes 25-30 minutes to commute to Corona(Sierra Del Oro) from Irvine.

          11. Planet Reality

            @ Reality check

            NEWSFLASH the premium areas of CT cost more than Irvine. Hartford is paradise? More like a dump.

          12. Phil

            Well, if you’re spending your extra 40 minutes a day writing different versions of the same comment on IHB, it’s probably a wash.

          13. tonye

            It will be a long day in hell before the 73 becomes a freeway.

            BTW.. did you see those signs about tax dollars being used to improve the 73 toll road? How can they use tax dollars for that?

          14. Tyler D.

            you being sarcastic? asians and service sector jobs? still watching bonanza for your diversity credits (hop sing)? maybe if they just got here with nothing…but their doctor kids will be paying cash for that house in irvine you’ll never afford, so…anyways…

          15. Tustin / Irvine schools

            To be precise, there is a section of Irvine where Tustin Unified School District set up schools within in Irvine for that section of Irvine. Mainly, West Irvine and most of zip 92602. But we know it’s the students that make a school so the schools are actually at par with Irvine schools. But you do lose the bragging right as to which school district your kids go to.

          16. RealityCheck

            NEWSFLASH try comparing homes with equal amenities. If you read a little closer you would realize that noone’s moving into Hartford, and noone’s buying a home with NB style location or amenities. Try comparing apples to apples when you compare prices and, no, you don’t currently live in Beverly Hills.

      1. Stock Investor

        “Desire to gamble” is not necessary “desire to gamble in Las Vegas”. Blackjack and slot machines do not require heat of the Mojave desert.

        For example, there are at least 9 casinos in Riverside county. More and more people are gambling online.

        Also, if we can legalize marijuana for medical use, next time we can legalize prostitution and gambling for the same reason.

        1. Swiller

          We should legalize marijuana and control it like the other drugs we have…alcohol and cigarettes, but marijuana is SAFER than both of those by far.

          Gambling and prostitution should also be legal. These acts are not crimes but acts done with free will and they do not victimize others. If someones ACTIONS cause someone loss, they should be punished for their ACTIONS. Do not take or restrict freedoms by making things “crimes” that are by nature not crimes. This is part of the problem….ignorance and a basic denial of our humanity.

        2. matt138

          Gambling at pala vs gambling in vegas. No comparison.

          Sure you can throw dice and lose chips at both, but that’s like comparing buying a house in Newport Beach vs. a house in Corona.

      2. tacoshark

        Indeed, all said about LV today could’ve been said about Detroit before…

        DETROIT is not Detroit. There are undesirable areas that people should avoid in DETROIT like any market. Unless you believe people are going to lose their desire to “DRIVE CARS”, DETROIT is going to recover and prosper.

        Finding renters for any but the least desirable properties is simply a matter of price. For a time, it may prove difficult to find renters at the price you want, but unless you are renting the worst property in the hood, you can find renters by lowering the price.

        Vacancy does not tend to be a problem in DETROIT. People generally don’t leave DETROIT for greener pastures. Many people leave because they can’t control “OF WEATHER”, but few leave because of lack of opportunity.

        DETROIT was overbuilt during the bubble, but DETROIT has also shown above average employment and population growth for decades, and I am of the opinion this will continue as long as people “DRIVE CARS”.

  10. quailoverthehill

    Attention, human traffickers: Don’t let this opportunity pass you by. ICE would never look for an illegal-alien “clown house” in the middle of Irvine. Submit all offers now.

  11. Aajiz

    Establishing the cash value of real property requires an understanding of risk and relative rates of investment return. Today, we will review these basics and apply a little simple math to show how to value real estate based on its cashflow value.

    Not under stand exactly math to show types

  12. JK

    Planet Reality has some points and IR does too. I think the actual reality is somewhere in the middle.
    PR makes a valid point that if rents decline then basically you won’t do well. Traditionally rents have increased a bit over the past two decades. Of course, you can throw out the last two decades since we are in “post bubble land” (or at least we should be if not for our govt).
    In a way you are speculating that rents will hold. If we were to see a domino affect from the shadow inventory released then some of those investments would not look so good. I also agree that it is a very tough time to be renting.
    Still IR has a point that if the price is right you can find renters. The question is what type of renters? Quality renters are harder to come by. What happens to those “squatters” that get evicted and now want to rent? Will they become poor tenants because they have been so used to the entitlement of free rent?
    All this rambling having been said I’d have to give the nod to IR’s corner in that I think Irvine has farther to fall and probably will. Still I guess that is speculation. Enough speculation to keep me on the sidelines from buying a personal property there (or closer to the coast which I prefer) and keep working my rentals with positive cash flow.

    1. newbie2008

      Everyone knows that free rent is a new right for the homeowners. Only those undesirable renters need to pay rent. ;}

      For the price to rent formula, the age or condition of the buliding is a large factor. Also in undesirable neighborhoods/bad tentants, mantenance may be a huge factor with excessive wear and tear.

  13. newbie2008

    LV has lost business with the Indian casino in CA. Substitues has decreased demand. LV is also water restricted, so future developments may be limiting supplies. There are many known and unknown variables to consider.

    One variable on cash flow investment, is the additional interest needed for a non-owner occuppied dewelling (unless the banks start non-documentated lending again or maybe has already started again)== I don’t think 5% interest is available for a non-owner occupied unit. Bad renters, major repair cost, bad neighbors scaring away the good renters, layoffs, change the “in place to live.”

  14. alan

    Very good work…

    A simpler axiom I remember is that cash flow value =10 x annual rent. Of course, back then mortgage rates were steady for many years around 7%. Getting money at 4% or 9% changes the game.

  15. Paul

    Thank you for such a detailed post! I think I understand all the math, but I’m confused by this line:

    > Why would anyone want to earn 3% in an equity
    > position when they could invest in mortgage debt
    > and earn 5%?

    What does “invest in mortgage debt” mean? How does it earn you 5%? Aren’t you /paying/ 5%? Or are you suggesting issuing loans to other people?

Comments are closed.