Things are slowing getting back to normal here. After being gone for a week and coming back and having to rebuild my computer after it crashed, I'm slowly starting to gain control over the items that piled up while I was away. One of the things I am catching up on today is my blog reading.
Last week, Kenric posted about the housing price drop in Phoenix. One thing he said was "If you have cashflow or breakeven you can survive this. That’s why cashflow is so important." That is oh so true. I have a co-worker who has been caught in the housing slump and next month will join the ranks of those who have been foreclosed on, a group that grew by 50,000 just last month alone. This co-worker is the epitome of the uniformed investor who jumps on a bandwagon and ultimately gets burned. A year or so ago, he bought an investment property in the Phoenix area and rented it out. His biggest mistake was in renting it out for less than his mortgage payment. He had negative cashflow from the start. Never mind factoring delayed costs like maintenance, vacancies, etc. There was no way he could get a positive cashflow. What's more, he know this and went into the deal willingly. His plan, like that of so many others in the real estate mania, was to hold for appreciation and then sell.
Through a combination of circumstance and ignorance, things went downhill quickly. The housing market tanked. He thought he couldn't sell the property while he had people renting it (even though I said otherwise), so he held on to it longer than he should have. As a result, he now owes more then the property is worth. One thing led to another and now next month he will lose the house and have a foreclosure on his credit report, not to mention an huge tax bill if the bank accepts a short sale before the foreclosure. Unfortunately, he still feels his only error was in not selling the property at the peak of the real estate bubble. The problem is, you can only tell a peak once you have receded from it. Sadly, he has learned no lesson from this.
Cashflow is king. Always make sure your rental income will cover your expenses!
Update: Literally about 4 minutes after I posted this entry, I found out my co-worker has sold the house. I don't have any more details than that, but I'm sure it was at a loss. His monthly payment was $2,600 and he had it rented for $1,800. Now, with all the foreclosures in the area. rents are around $1,100.