May 13, 2008

Here's how one screwed Miami condo investor thinks he's gonna break even on his depreciating debt-trap.

It's gotta suck for millions of investors around the country (and around the world) who bought debt-traps that only rent out for a fraction of what it costs to "own".

Negative cash flow on a depreciating condo or house is the worst of both worlds.

I liked this spreadsheet though. Oh, the optimism. Yup, the price is gonna go up, not down. Yup, rental income is going to ABSOLUTELY SOAR. And no, expenses won't increase - not at all!

Amazing. And sad.

Too bad this poor sap didn't do a spreadsheet BEFORE he bought his debt-trap. Too bad millions didn't bother doing a spreadsheet before they took out toxic loans or listened to realtors on commission.

And too bad that just because you put numbers on a spreadsheet doesn't make them true.


guy n. cognito said...

why does the value go up but the tax cost does not? i guess he lives in the one county in the whole country where the elected officials lower the tax rate as revenue increases, as opposed to increase their spending.

Roscoe said...

On his spreadsheet, he made the mistake of assuming his taxes will remain constant. That isn't going to happen in Miami-Dade.

Another possibility is that, if the builder owns 80% or more of the units, they could move to dissolve the condo, convert the building to apartments, and pay Spreadsheet Boy the market value of his debt-trap even if it didn't pay off the mortgage.

FL Legislature made condo dissolution easier last year under the guise of hurricane/disaster recovery. If you bought in such a development, especially recently converted apartment buildings, make sure you know where you stand legally.

Mark said...

Posted: November 10th, 2007

It must be soooo much better now...

Anonymous said...

And how about the insurance costs that are rising faster than taxes? Plus rising costs of energy and water through the HOA.

And he assumes naively that rent will increase despite the fact there is a glut of apartments and condos in Florida. Here in Central Florida rents are falling fast. Plus the depreciation effect of older property. Yes property in Florida wears fast. Trends are changing faster than ever and there is no remodeling budget.

"Been there and done this" in the late 70's. Got out of renting after all the grief. Luckily we did ok after taxes, but not worth it. Did better investing in money market instruments T Bills at the time (12%) (There is a positive side to inflation!)

Andy in San Diego said...

Why sell in 2014? It's just getting good then. Why, if he holds on, he'll be a millionaire by 2020!!!

Anonymous said...

You know... there is still the possibility that the dollar can collapse by 2014.

In which case, if a loaf of bread costs $10 in 2015, then his $400K condo would buy 40,000 loaves.

I remember when bread was $1 a loaf and an average house cost $40K - $60K

What's the price of bread these days? $2-$3? We're between a quarter and a third of the way to where the dollar destruction should be.

But what are we going to do when the price of bread gets to $20 or even $50?

And don't even THINK that you'll ever afford steak again...

Anonymous said...

I think he missed the part about opportunity cost and present value of return... his $69k is worth more like $28k today...go to school

DaveO said...

Wishful thinking?

Anonymous said...

Yes, he needs to factor in increases in both property tax & income tax (from the rental income). Plus he should be taking depreciation of the asset in his taxes also. Property taxes just might be flat as rates go up and assessments go down but I would have that footnoted.

HOA increases +special assessements should be factored in (or at least noted as a wild card).

Its an uninformed guesstimate at best.

brian t said...

I've seen worse. This guy is actually planning to pay off a fair amount of the principal i.e. it's not one of those interest-free mortgages that a friend of mine got. So, even if the taxes go up, rent stagnates and the market value went down a bit, he might have escaped taking a bath, overall. As things are now, however... yep, he's screwed.

Anonymous said...

I have to laugh of these so called "investors" who don't even have a clue about the concept of Time Value of Money. That spreadsheet is wrong! That's not the way to calculate returns in real estate. Oh, and by the way, I studied Real Estate Analysis in B-School.

And no, I'm not teaching anyone how to do it like the pros.

wc said...

Besides his taxes and expenses staying the same - he also expects to be able to up the rent 8-11% more a year when there is going to be tons of inventory and no one is getting raises more than the government stated inflation rate and his drop in market value is a gross underestimation. What a boob. A good case for why no child left behind is so darned important

Anonymous said...

the stupid investors that are out there, the more dumb wealth that is destroyed. i'm fine with that said...

I live in one of those luxury debt traps that sold for well over a million in 2005.

My rent dropped $900 from last year to this year.

Even in good times it's well-known that the high end luxury market is a horrible choice for rental properties.

Nice going there, Mr. "Investor."

Out at the peak said...

Market Value in 2014 is assumed $370K, but he'll sell it for $400K. 0% vacancy, no problem! Rents rising up to 12.5% each year ($1600->$1800), the market is set!

Less than a $1000 loss. Awesome investment!

And if the neighbor's condo goes for $220K, double down!

notetaker said...

"why does the value go up but the tax cost does not?"

and look at his belief that rent will go from $1300 to $2000; that's an increse of over 50% yet he expects the cost of government to go down.

Yoski said...

Miami-Dade has a 16 year supply of condos. Prices will fall for at least the next 5 years, probably longer. How about rents? With 16 years worth of supply currently unoccupied rents are not exactly going to soar. They'll mostly likely fall slightly over time.
The tax projections are also overly optimistic. Miami-Dade is one of the most corrupt and inefficiently run counties in the US. Taxes will only rise.
Best option for this specuvestor, cut your losses. Walk away from your $70K downpayment instead of throwing good money after bad.

Yoski said...

anon 5:07 pm
" there is still the possibility that the dollar can collapse by 2014.

In which case, if a loaf of bread costs $10 in 2015, then his $400K condo would buy 40,000 loaves."

True what you're saying. But a condo in Miami-Dade is the worst real estate investment on the entire planet...possibly the entire universe. There are a fair number of nice places that never saw a bubble with reasonably priced houses. Why not invest there if you want to hedge against inflation. Miami is not one of those places. It's a cesspool infested with criminals, illegals, drugs, hookers, homeless, mobsters, gangs, specuvestors and corruption. I know, I live here. On the upside, the weather is nice and I have a job I love.