Even More Affordable Townhouse: $19K Reduction at 2349 N. Wayne in Lincoln Park
We last chattered about this 2-bedroom townhouse at 2349 N. Wayne in Lincoln Park in July 2008.
See our prior chatter here.
Back in July, we chattered about whether or not the townhouse was “affordable.” It is still on the market and has been reduced $19,100.
Does this make it even more affordable?
Here’s its history again:
2349 N. Wayne: 2 bedrooms, 2.5 baths, 2400 square feet
- Sold in September 2001 for $420,000
- Was listed in July 2008 for $559,000
- Reduced
- Currently listed for $539,900
- Assessments of $273 a month
- Taxes of $5003
- 1 car garage
- OR you can also rent it for $2950 a month
- Heidie Maslo at Coldwell Banker has the listing. See more pictures here.
Only another $19K before a conforming loan works, so maybe they will start getting offers.
This appears to be cheap for the square footage, but what are they doing with the space? The two bedrooms are supposedly 16×15 (good size) and 15×11 (marginal) and the kitchen is 12×10 (marginal). For a 2BR with these room sizes, I’d expect more like 1600sqft.
Using Stevo’s just-set-out calculation for rent:purchase–which is monthly ownership expense of 80% of purchase at 5.5% (I/O) plus assessements and taxes needing to be equal or less than rent–which can be expressed as:
[(12*(R-A)-T)/.055]/.8=P
Then this is a deal at $540k, assuming the rental ask is “market”.
[(12*(2950-273)-5003)/.055]/.8 = $616,386
I’m a little dubious about the rental ask being market (esp. b/c it’s been for rent for 6+ months), but as I’ve admitted, I’m out of touch with the rental market.
I guess tht tells us what the market thinks of that formula.
Well, if the real rental value is $2500 (which seems closer to reality to me), you get a more reasonable number:
12*(2500-273)-5003/.055/.8 = $493,659
Thus, further support that the rental ask is nonsense.
Anon(tfo) – your equation gave me a pounding headache just glancing at it. I thought I was finished with that after college stats.
If you’re going to use an interest-only loan in the calculations, then I reserve the right to assume 2 months of free rent each time I sign a rental contract.
HD:
It’s not mine, it’s Stevo’s. I plan to use it often. I also plan on hearing from Stevo that the rent used is not “market” anytime the result is contrary to his storyline.
Tipster–I’m just using Stevo’s calculation. Any complaints, take it to him.
Tipster, why put reality in the equation?
LOL at Bob’s previous comment… I thought the same thing, then October hit 🙁
“Bob on July 3rd, 2008 at 2:09 pm
juliana,
If you haven’t judged by the weak dollar already: its a little too late to internationally diversify.
I agree with RE but the stock market probably can’t go much lower without a mad max economic scenario.”
My brain doesn’t work very well with equations and formulas. I understand the value of the equation and I’m actually quite impressed you could reduce steveo’s argument to a formula. When I have more time later today I’ll take a look at it and figure out what’s going on.
Yeah these strolls down memory lane are quite amusing in retrospect.
Hey if I could time the market perfectly I wouldn’t need this 9-5 job and would be living in one of these 1MM homes that are profiled on here 😀
anon(tfo) thanks for the horrific flashback to real estate finance class. Its a good reminder that RE finance is still as a good a sedative to me today as it was a decade ago.
slightly OT, but where are the jokers who said financial markets have “stablized”?
Get ready to own a couple of more banks, you’ve earned it.
The typical equation I’ve seen takes the rent – expenses and divides by the desired return rate (eg. 7%). It supposes you pay for the property in full (no mortgage).
If you want 7% yearly return, you would pay:
X = (12*(rent – assessments) – taxes) / .07
This equation paints a much weaker picture of what places are worth as a pure investment. This is skewed by ignoring tax benefits and potential appreciation. You could add personal_tax_rate*(yearly_depreciation + taxes) to the numerator.
However, you should also be scaling rent by vacancy rates (typically 10-25%) and subtracting insurance/maintenance costs.
By most reasonable measurements, rental properties at these price levels are crazy bad investments.
CB,
If only half of America even had basic math skills and realistic assumptions regarding their investment opportunitites we wouldn’t be in the pickle we’re in today.
Yeah, that’s the *investment* equation; the equation I put together–from Stevo’s “conservative BOTE calculation” is supposed to be for an owner-occupant. I think that everyone agrees that the calculation needs to consider different things, but almost no one agrees what it should include. Stevo’s is admirably simple, but I would say that it’s biggest problem is it works well only if you have *good* information about substitute rents (and I think it overvalues places a bit). When you’re working with stupid high asking rents (as here), it will never give a reasonable valuation.
Steveo’s equation also fails to include principal payments because the prinicipal payment is really a transfer from one asset class to another (cash to real estate), which is basically building equity. He doesn’t address that equity for tens of millions of americans is disappearing by the day, which i guess is all the more reason to pay interest only
If the price you pay is: 20% down payment + 80% borrowed
Then:
X = 20%X + 80%X
Suppose that 80% accrues interest at, say 5.5%
Minimally, the building should be able to pay for itself. Where, income >= expenses.
Income >= 5.5%*80%*X
or
X
…. got cut off
or
X
… hmmm …
or
X is less than or equal to: (Income/.055)/.8
This also happens to imply 0% ROI which most people would consider inadequate.
You guys are killing me with the formulas.
Sorry, I just had to point out that Steveo’s formula is wrong. It’s dangerous to rely on incorrect models … just ask the investment banks.
—-
For brevity, the correct equation is this (assuming 7% ROI):
Price = Yearly Income / (.8*.055 + .2*.07)
Fair market value: $375k to $467k
The above equation means my apartment is worth $175,000 which is nearly double the 110x rent rule of thumb.
“It’s dangerous to rely on incorrect models … just ask the investment banks.”
No those bankers were paid handsomely with cash bonuses during the boom. Ask their idiot shareholders who bore all the risk for their decisions.
Yeah, but again CB, not as an *investment* decision, but as a *am-I-overpaying-for-the-place-I’m-actually-going-to-live* decision. The metric is different for most people.
If you apply an *investment* decision to all personal comfort expenditures, I admire your ascetic sensibility, but want no part of it for my own life. And it’s not realistic for very many people.
What is this the frickin algebra blog?
I apologize for all the math … if you can be conservative with the price you pay (and there will be deals popping up this year), then you have an option if you decide to move without having to sell.
Plus, you won’t have to worry about losing money when you sell.