Revisting Rent vs. Own

One of our not-rocket-science theses here at WeHoHo has been the need for pricing to reach a rent-equivalent level.

Now, we would agree that there's some intangible factors that come into play with owning vs. renting, and wouldn't expect a nice property in a nice area (particularly an SFR) to be purchased with a view to it being cash flow positive if rented out tomorrow.

That said, in the condo market, the rent vs. own analysis should still be alive and well, as potential buyers are likely weighing the "deals" in the current rental market with the pros and cons of buying, including: need for a significant % down payment, pride of ownership, have prices bottomed, no more "quick buck flipping" as in the past.

I thought this property was an interesting case study:

1222 N. Olive Dr #306 (90069)
1 BR / 1BA, 598 sq ft
For Rent: $2,295/mo

Bright and open unit with blond bamboo floors throughout along with updated kitchen and bath. Walk in all glass shower. Views of the Hollywood Hills and downtown Los Angeles. Safe and secured parking. Ideal WeHo location walking distance to Sunset Strip, Santa Monica Blvd and La Cienega's restaurant row. Located on one of the most beautiful streets in West Hollywood with tons of parking. The building is very quiet with an absolutely amazing pool that gets great sun. Utilities incl. PriceNeg

Sales History:
12/20/06 - $385,500

3/2/05 - $328,500

6/20/00 - $109,000

6/17/99 - $88,000

8/19/91 - $119,000

5/7/90 - $115,258


Lots going on here. Let's review:

1) Answer to the "how long can a cycle be" question with a sale around the prior top in the early 90s, and an 8 year span resulting in a sales price approx 25% lower

2) A bubbilicious 3x increase in less than 5 years from 2000 - 2005

3) A close-to-recent-peak last purchase

4) A current owner potentially waiting out the market/trying to recoup costs? I won't speculate, as there could be any number of things going on here

5) A seemingly way-above-market rent. Yours truly has been researching rentals in WeHo recently, and given the current market, you can get a nice 2BR in a nice area for around $2k. This is in a decent location, but almost $2,300/mo for a small 1BR?

However, it starts to get more clear if you make some reasonable assumptions on the monthly nut this owner is likely carrying:

$385k purchase
20% (being generous for the time) down
5% rate (again being generous, assuming a recent re-fi at low rates)
$300/mo HOA (probably at least that since bldg has a pool)
+ taxes
= $2,377/mo expenses

I think this has to get under $2K/mo to rent, meaning the owner is eating around $400+/mo, not including repairs or other related expenses. Not terrible, given the relatively small numbers, but some pain likely to be felt nonetheless.

Oh, yeah - and assuming $1900/mo rent (which I think is still too high), the purchase price equivalent would be around $285,000.

UPDATE:
After posting this earlier, I noticed another unit in the same building for sale, which makes the plot thicken:
1222 N. Olive Dr #314
$414,900 (REO)
2 BR / 2BA, 812 sq ft

Last Sale: 11/18/04 - $415,000 (100% financing and looks like at least 2 subsequent cash-outs)

The real evidence of "funny money" going back 5 or so years ago continues to drip out. Will be interesting to see where this sells. Any bets that they get less than the $385k last sales price of the 1BR above?