Equity Investment In Residential Property
Hello,
I am looking to see if this type of deal is feasible. Normally, equity deals are done for multi-family or other Commercial however, this is for a SFR, Would anyone do this or not. If not, why not?
The deal calls for an equity investment in a SFR property in San Francisco in one of the best neighborhoods. The equity investment is for a 20% stake in the FV of the property (within 1 year) expected to be $2.9mm for a $580,000 investment. The investment is to be held for 5 years minimum. No loss of principal. The yield is expected to be between 11-15%. The investor will be responsible for 20% of the property taxes and insurance. The principal owner (80%) will be responsible for the rest and all maintenance. The value can be verified by an appraisal and comps. At the end of 5 years, the investor gets paid back their entire principal + 20% of the appreciation from $2.9mm to value at the end of 5 years. This neighborhood historically has appreciated at 20% per year and we expect future appreciation to be between 10-15%.
Please advise on your thoughts. Would you do it? Why or why not?
11% seem a bit light on the return.
Especially since the return is pure speculation, based on the premise that the property value will go up in a market that is dropping rapidly...
Chris
San Francisco city real-estate has not dropped as far as I have seen. Even in its current state, SF real estate has grown 5-10% depending on specific neighborhoods in the city. Why do you say it is dropping? The case/schiller index looks the whole bay area and includes east bay like and central valley areas. Most of the issues are in Stockton, Tracy and the like which are not bay area. Bay area is really from Marin to San Jose. Real Estate is local. Do you have numbers for SF City in particular to say it is dropping?
cjmazur
What is a reasonable return?
We look at this a relatively safe investment for someone that knows the SF City real-estate market. If someone has cash to park, this is better than a bond investment. For a relatively safe investment, this is a pretty good return when compared to the market as a whole. No?
I would expect 20-25% for the risk associated with it.
looking at http://www.trulia.com/home_prices/California/San_Francisco-heat_map/ I see ALOT of declining neighborhoods.
10 second reality check. I Googled "case schiller san francisco" and click the first link. The first thing I saw was "Case-Shiller housing index for February is out today. San Francisco metro area single family house index on average is down to 07/2004 level."
This is enough for me to question your assumption. A 20%-25% return would not be enough for me to even consider your speculation....
See also http://www.housingchronicles.com/2008/06/case-shiller-where-will-prices-go-next.html and search for Francisco. -35%?
Indeed, the graph is going the wrong way. The SF MSA looks like a major bubble to any rational, objective minded individual.
http://www.swivel.com/graphs/show/28479063
Regarding Would you do it? Absolutely not.
Denial is simply a river in Egypt.
We offer a lot of information regarding land contracts on our website if you can see the site on my profile here. I would be happy to help you out with this.
Sincerely
Marc
Microsoft Excel, unless you are doing a lot of these.
If you are doing a lot you might try Quickbooks