Los Angeles, CA 90019
(323) 487-9865
Eric Zunkley is a licensed real estate agent operating in Los Angeles, California.
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Below is a little video describing the product.
Recently I’ve come across a few transactions in which people where over paying to purchase real estate. I wanted to take a moment to discuss how I value real estate for single family homes.
When you’re purchasing or selling real estate each property is unique. The unique qualities can increase or decrease the demand for a property. However, the price range for a property will generally hover around the median price for a local market. For example, let’s look at the two very popular metrics in real estate, days on market and median price for single family homes over the last 12 months (see charts). Days on Market and Price are both good indicators for demand. If a property is properly priced for the area it should sell around the median days on market. After getting an idea of the local market you need to dive deeper to get the specific comparable properties.
Comparable properties are sold homes within the last 6-12 months within .25-.5 mi with the same number of bedrooms, number of bathrooms, similar zoning, similar lot size, and similar quality. If you don’t have this information you can’t make an informed decision about the price of the property.
Redfin and Zillow both offer estimates of value. Recently while doing a CMA for a property the average difference between the Zillow Estate and the Sold price for 10 properties was 14%! That’s $70k on a $500k home. In Los Angeles don't use Zillow or Redfin estimates by themselves.
Real estate is just one of the many asset classes an investor can choose from. How does someone make that decision? How do they compare the different asset classes? In this post I'm going to briefly compare the returns of two real estate options with and without leverage and the S&P 500.
One of the advantages of purchasing real estate is cheap financing. Right now you could get a 30 year fixed rate mortgage between 3.5-4%. If you decide to purchase real estate without leverage you're neglecting one of the major advantages of real estate.
Below are two real estate investment options. On the left we have cash purchase of a condo and on the right we have a 4 unit multifamily property with 25% down. Both are using the same $50k cash outflow.
Condo
Multifamily
Even though both investments are using the same amount of cash you can see the effects of leverage when you look at the return on equity (ROE). In the all cash purchase example ROE is 6.7% and in the leveraged multifamily the ROE is 11.9%. Clearly using leverage to purchase real estate offers advantages over purchasing with cash. Some of the numbers are different in the comparison, for example Operating Expenses and the depreciation. Typically the Operating Expenses are lower on multifamily properties. Deprecation is based on the how the city accesses the value of the property, part of the value is assigned to the land and to the building, and you can only depreciate the building. The percentage listed is the building or improvement portion of the value.
By using ROE, I can compare real estate to investing in stocks, specifically S&P 500 ETF trading under SPY. For those who aren't familiar you can learn more HERE. I picked the S&P 500 index because it is incredibly diversified and a cheap option to investing in stocks. On SPDR's website they show that the ROE for SPY is currently 24.13%. As seen in the example above leverage effects the ROE. Online and I found a Leverage Ratio of 3.68 or 27% for the S&P 500. This leverage is inherently baked into the index through the individual companies themselves, no additional leverage is required.
The purpose of this exercise was to evaluate if a cash deal is worth investing in. Going through the process I have decided that investing in real estate without leverage is not for me.
Aside from the returns it's worth considering the risks associated with real estate such as, lack of diversification, liquidity, and the frictional costs of selling. There is no doubt that investing in SPY offers significantly more diversification, liquidity and lower frictional costs. Because of this you should be rewarded more for investing in real estate. Before investing in anything look at the numbers and make sure you're being compensated for this risk!
Notes
When I'm working with a buyer I never know when their perfect home will come on the market. This was the first offer I wrote for this client and his first offer on a single family home and it was accepted. More info to come after the close.
Updated and turnkey! Home recently appraised at $530,000, but owner wants it sold now. Home was completely updated and is ready to be moved into. New windows, electrical, HVAC and more. This home is a must see.
Listing Agent: Alex Valenzuela
DRE#: 01216170
Courtesy of: Keller Williams Realty Downey
Broker/Agent does not guarantee the accuracy of the square footage, lot size or other information concerning the conditions or feature of the property provided by the seller or obtained from Public Records or the other sources. Buyer is advised to independently verify the accuracy of all information through personal inspection and with appropriate professionals.