(July 2006) The Cost of a Square Foot

In every major city the cost of a square foot is the measuring stick that one can determine the value of living. In Manhattan, New York, they reached $1000/s.f. many years ago. As you recall from my trip to San Fran in February, that $700-$800/s.f. for a condo was the norm in Pacific Heights. In L.A. $400-$500/s.f was found out in Ventura but $1000/s.f. and higher was common in areas like Long Beach. Last year I noticed a Manhattan condo selling for $25,000,000 for 5,000 s.f.. That’s $5000/s.f. (I will be checking out Paris prices this July so look for my report when I get back). In Vancouver our common price per square foot in Downtown or Westside is $500-$600/s.f. which pushes prices up in Burnaby at the Brentwood Gate project to $440/s.f. for the wood frame low rise and $500/s.f for the concrete highrise. The Fairmont in Coal Harbour is selling at $1,566/s.f., The Erikson in North False Creek is $1,450/s.f.-$1,600/s.f.

The Cost of Renting and The Cost of Money

In Downtown and West side it is common to command rent at $2/s.f/month so 1,000 s.f. unit should generally rent for $2,000/month. That rental income used to cover the monthly payments of a mortgage of 75% of the purchase price plus maintenance fees and maybe some of your property tax. The best rates in the city for maintenance fees is $.25-$.30/s.f. and depends on what these common costs cover. With the increase in price per square foot and the maintenance fee rates over the last several years, the rent of $2/s.f. in the West Side and Downtown may no longer cover these costs. You may have to put 40% as a cash downpayment in order for these same rents to cover the balance of 60% financing monthly payments and maintenance fees. The rents are not going up in stride with prices of investment condos. As more and more buildings complete, more people have to move to our fair city and take up this increased supply or you have a surplus of condos. Some one is going to lose out and may have a vacancy longer or have to lower the rent. The Investor is now speculating that the property values will appreciate more than enough to make up for the carrying costs so they will get a half decent return on their investment.

My basic formula for what an investment should yield as a bottom line, is taking the purchase price of the investment, say, $500,000 and multiply it by the prime rate, say, 5% (which is a general cost of borrowing for prime customers). You get $25,000 per year. That is the basic cost of $500,000 for a year. Divide this number by 12 months and you get $2,083.33, the NET monthly income I should be receiving from that investment. (forget the cost per square foot). If the investment cannot get this NET income, I keep on looking. Recently I just purchased a pre-sale which will complete at the end of 2007. It’s a Live/Work 2 level Townhouse in the Brentwood area of Burnaby for $508,000 + GST = $543,560. I needed to put a deposit of 15% or $76,200 down. The ground level is commercial zoned and is about 775 s.f.. The upper level is a 900 s.f. apartment. With a total of 1,675 s.f. it works out to be about $325/s.f. which is a great price to pay when everything around the area is selling for $440/s.f.. That takes care of the appreciation upside potential. Now if I take the purchase price of $543,560 x 5% = $27,178 / 12 = $2,265 then add maintenance fees of $350/month and property taxes of $200/month, the monthly income I must get is $2,815/month. I feel I can get $1,350/month from the upper level 2 bedroom apartment and the balance of $1,465/month from the commercial space. I’ve done about the best I can do right now in this market place. Monthly income is projected to net 5% and there is a good upside for capital appreciation.

 

To Buy or Not To Buy? Is It Too Late??

What people do not realize is that, even if property values remain the same for the next 5 years, which is highly unlikely, you are paying off the mortgage and realizing about 4% to 8% return per year on your down payment. How does that happen? With today's lower mortgage rates, your principal amount of your mortgage is being paid off at a much greater pace. Now, 35-45% of each payment is going towards paying down your principal outstanding balance. Take for example the little 1 bedroom condo my son bought last year for $118,500. With 25% down or about $30,000 and a mortgage of about $89,000 at 3.45% (a variable rate), his monthly mortgage payment is $445. At the end of a 5 year term he will have paid off about $12,225 and have a balance of $76,650. If the property value remained the same in those 5 years his equity would have increased by $12,225. With the original $30,000 he invested he will have made 12,225 / 30,000 = 40.75% over 5 years = 8.15% per year. That doesn't even take into account the monthly surplus. The maintenance fee which includes hotwater/heat is $140/month and property taxes = $75/month. Total monthly costs $660 and the place rents out for $1.25/s.f /month or $750 per month. That's an additional $1,080 per year which would add another 3.6% to his yearly profit or it could be used for miscellaneous unplanned expenses. As for the capital appreciation factor, the property is now worth $150,000. He has so far made around $30,000 on his $30,000 investment in 1 year. Another happy customer!

Give me a call if you want to get together for a chat. I’ll tell you what I know.