Blanche Evans in a Realty Times article yesterday wrote a sunny piece entitled "Will Investors Buy Homes in 2007?" that would make Lereah proud.  She said of difficulties faced by investors currently:

What’s missing for investors, at least temporarily, is the momentum of price appreciation, which allowed investor/speculators quick capital gains that they weren’t seeing in any other form of investment. That means that investors in the current market are moving from flipping homes to buying and holding. The strategy is to take advantage of high inventories to choose wisely, hold longer term and then cash in at the next seller’s market.

John said it best, I think when he told me that Evans "re-defines being hopelessly stuck holding the bag on a failed flip as a new "buy-and-hold" strategy."

Ms. Evans also stated:

Investors can adjust their strategies to the marketplace, as long as they have financial staying power.

So how much "financial staying power" does an investor need in this market?  Many thanks to Asset Hunter, who dropped the following comment [#90] in our "Submit Ideas" box, sharing his analysis of his rental with us:

We own some commercial income property, so I decided to use the same basic formula to the house we’re renting.

I agree with whomever it was that said, “Real Estate Investing is Fifth Grade Math.”

For your amusement… Here’s the math for our rented house in Arizona:

Income:

$ 14,400- We pay $ 1,200 in monthly rent

Expenses: (estimated yearly)

$ 1000 Vacancy Allowance & Collection Losses
$ 1500 Prop Taxes (verified)
$ 900 Insurance
$ 1000 Maintenance & Repairs – normal & between tenants
$ 400 Home Warranty
$ 180 3 Home Warranty Deductible for Visits
$ 200 yearly accounting & legal fees
$ 1000 Property management, advertising & rental commissions
$ 250 Utilities while vacant
$ 250 HOA fees
$ 250 misc. expenses & administrative costs
======
$ 6,930 Total Yearly Expenses

$ 7,470 Net Operating Income Before Debt Service

$ 7,470 / $ 335,000 (they paid) = 2.23% ROI if they paid cash for the property

or:

$ 7,470 / 12 = $ 622 to make a payment at 100% financing to break even monthly

$ 622 / month net monthly income ~ 30 year mortgage ~ 6.5% APR ==
$ 98,407 Purchase Price
(not counting transaction costs & other expenses when purchased)

So… somewhere between $ 98K and $ 335K is probably what this place is “worth”

Obviously I’ve rounded off the corners in the estimates, but these are pretty scary returns when looking at the “P/E” ratio of the house we’re living in here in the NW Valley of the Sun.

So when you see somebody taking their new-build house “off the market” to rent it out for a while “waiting for the market to go back up” you can quickly estimate where they’re really at.

 Evans optimistically stated:

Investors stand to gain in markets where other sellers are panicking. They can pick up choice properties at better prices.

At better prices than what?  As Asset Hunter showed, investors in Phoenix are generally having to choose between going cash negative, or a poor ROI. A better price in my mind would have to be one that allowed me to purchase an appreciating asset and/or one that generated a positive cash flow.  Otherwise it’s just a price that’s "not as bad."

So back to Evans’ statement, "Investors can adjust their strategies to the marketplace, as long as they have financial staying power."  I have to assume that for the 7200+ investors trying to rent out their home in Phoenix metro currently, to not "adjust" means to lose the property to foreclosure.  As 2007 unfolds, we may find that "non-adjusting" investors are increasing in number and becoming a bigger drag on the market.