Category Archives: rental property

Q. I am saving money to buy a home, but I’m not totally clear on what the term “earnest money” means. What is earnest money?

A. First, let us commend you on saving money for a home. Buying a house is probably the most important purchase you’ll make in your lifetime – and having cash available gives you more options with your purchase.

Earnest money is an important factor when you’re making an offer on a house. When you make an offer to purchase a house, the “earnest money” is the deposit that shows the seller you are serious about the purchase. The money opens the escrow and can be applied to the buyers’ down payment or closing costs.

The earnest money amount is negotiable. It typically varies depending on the price of the house and strength of the market. Generally, it’s recommended that your earnest money deposit be about three percent of your offered price. And although earnest money is not required by law in most states, it is standard practice in local real estate transactions.

When the seller accepts your offer and earnest money, the property is taken off the market. In a hot real estate market, a large deposit may impress a seller enough so they will accept your offer instead of someone else’s.  However, buyer beware…it can also put you at significant financial risk if for some reason the transaction runs into trouble not covered by a contingency in your purchase agreement.

The Standard Offer And Purchase Contract stipulates under what conditions your earnest money will be returned if the contract fails. We’re experts on this stuff; if someone you know is in the market for a home and needs competent and caring representation, please call us at 408-861-4813.

Have Real Estate Prices Hit Rock Bottom?

The secret is that not all properties hit rock bottom at the same time. Many properties have already hit bottom and they have already been purchased. Somebody else got the deal. Some properties will never hit bottom; the sellers will simply remove them from the market and re-list then in better, more expensive times. You can describe the market like this: If you threw a handful of small rubber balls in the air, they would not all hit the ground at the same time. They’d all bounce at different times, just like individual house prices.

Not every seller will come to the same conclusion at the same time. A     property is not worth what the seller wants, what the seller paid or what somebody else paid. A property is worth what a willing and qualified buyer will pay today, and not a penny more. The good news is sellers are starting to figure that out, one at a time.

The trick is identifying the bounce — and when to buy a specific property. This is particularly important with investment properties. As an investor looking to maximize profits, the price of a specific property is at rock bottom when the return on investment is better if you buy the property than if you leave your money where it is. Compare the real estate rental income and positive cash flow to the other investment options we all have, i.e. stocks, bonds, savings accounts, etc. As real estate prices come down, and consequently the mortgage payments and taxes come down, while at the same time the demand for rentals is growing, at some point the positive cash flow will make the investment irresistible. That is the bottom for an investor.

You must ignore everybody else and their investments. What we see now in hindsight is that many people paid too much when they invested in a seller’s market. Remember, for you to win, somebody else has to lose. Because so many people are losing so much of their equity, it makes your ability to win much easier in a buyer’s market like we’re in right now.

In a stable market, real estate prices are not driven up by investors. Home owners should be the predominant driving force. When a renter sees that their rent is higher than what they would be paying if they were to buy a similar property, the tenants tend to once again convert to homeowners. That is the bottom line for tenants. We know not all tenants have what it takes (income, savings and credit) to secure the American dream of home-ownership. Consequently, there will always be tenants and they will always need investors like us to provide them with a home.

It’s been years since we’ve seen prices low enough that we could invest in nice properties in great locations. If you’ve ever been tired of hearing, “I remember when I could” or “I should have bought them all when I had the chance.” Now you can. You have a second chance — take advantage of it!

Would you recommend I buy investment property here in Sunnyvale, elsewhere in Santa Clara County, or out of the area?

Would you recommend I buy investment property here in Sunnyvale, elsewhere in Santa Clara County, or out of the area?

We STRONGLY recommend purchasing investment property; we cannot think of a better or safer way to gain wealth, in the long run, than to own more real estate! Where you should buy is the better question.

Purchasing rental property?OK, so where should I buy and how do I go about it?

The first thing to decide is whether you are more interested in positive cash flow or overall appreciation. This will help in determining where you should look to make your purchase.

Buying real estate in the Sunnyvale area, or really anywhere in Santa Clara County, would be a purchase based on overall appreciation. This is because a home’s value here in Sunnyvale is very high in relation to it’s rental value; but, it can provide excellent appreciation in the long run.

For example, let’s say you buy a four-plex in Sunnyvale for a purchase price of $1,000,000. With 25% down ($250,000), your monthly payment for principal, interest, taxes, and insurance will be in the range of $5900 per month. You’d also have to add another $400 per month for expenses like water, garbage, and landscape maintenance, bringing your total cost to $6,300 per month. Since it’s local, you could likely manage it yourself, saving the property management fee.

Current rents for the four units would probably total in the range of $5,300 per month, so you’d have a NEGATIVE cash flow of about $1000 per month. To make this purchase profitable in the long run, you’d need the property to appreciate enough to overcome this negative cash flow AND provide a decent return on your investment (the down payment).

For example, if your desired return is the equivalent of 8% on your money, you’d need the property to appreciate an average of $2666 per month; the $1,000 negative cash flow PLUS $1666 per month (the return on $250,000 at 8%).

Now, contrast that with a positive cash flow investment (not really possible in Sunnyvale), for which you’d have to look out of the area.

As an example, in Cincinnati, Ohio, today you can purchase an apartment complex of 34 one-bedroom units for a purchase price of $750,000. With a 25% down payment, the total cost for the loan, utilities, taxes, property management, etc. would be in the range of $11,000 per month.

Current rents for the units would be in the range of $13,000 per month, so you’d have a POSITIVE cash flow of about $2000 per month. While the investment is not likely to increase much in value (appreciation), the return is realized on a monthly basis, through the cash flow. A return of $2000 per month on an investment of $187,500 equals a 12.8% annual return on your down payment, even if the property doesn’t appreciate. You’d of course have to factor in a vacancy rate, so the return would likely be a little less.

We welcome you to post your comments and/or questions regarding these or any other real estate investments. If you’d like to discuss them in person, or get more information about anything real estate related, please give us a call at 861-4813! We have specialized in selling residential real estate in Santa Clara County, and specifically in Sunnyvale, since 1984. We’ve successfully sold over 1200 homes in Santa Clara County; you won’t find anyone more knowledgeable about the market here!