Whole lotta building going on…

In our areas (Silver Lake / Echo Park / etc.), there are tons of small lot subdivision projects in the works.

Off the top of my head, I can think of at least four projects going in right now, and there are definitely more that I’m forgetting.

So, the question for all of us apartment people, is: What will be the effect on rents in our neighborhoods from the coming wave of for-sale single family homes on tiny lots?

To answer that question, we need to be able to compare the monthly expense of renting to owning.

From speaking with a lot of developers of this kind of product, the pricing developers expect is generally in the $650k+ range for a 1500 sq ft home ($433 / sq ft). At 4.5% interest, the monthly payment required for a $520,000 mortgage (80% of $650k) is around $2,634. Property tax is around $680. Insurance is probably $150. And there are probably home owners’ association dues of $50. That’s a total of around $3,500 / month.

It’s important to remember that almost all of that is pre-tax money (since both mortgage interest and property tax are tax deductible) – so that $3500 is equivalent to paying something like $2000 in after tax money.

If you know our area at all, you know that renting a 1500 sq ft home in very good condition is likely to be $3,000+ / month in after-tax money (since rent is not tax deductible).

That means there’s roughly $1,000 / month in after tax savings if you buy. That’s $12,000 / year on your downpayment of $130k (20% of $650k), or 9%.

Bottom line: If you’re looking for a large place, you’re probably going to be better-off buying rather than renting, assuming you have the dough and the credit. So all of us in the apartment business need to be considering whether the rents we are getting on larger units are sustainable.