Residential-Investment Property Analysis

This page offers information for investors. It provides a historical perspective that reflects the unique factors pushing the value increases of the past 3 decades, i.e., growth control and lack of available developable land, the continuing expansion of UCSC, the phenomenal success and growth of the "Silicon Valley", the overall beauty of Santa Cruz County and the desirability of owning property located adjacent to the Monterey Bay.

SINGLE FAMILY RESIDENTIAL ANALYSIS

Investment Tax Info.
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The chart above displays the values for all Santa Cruz County residential sales during the corresponding years. The apparent increasing difference between the average price and the median price is caused by the large incremental increases in both the average and median prices. The actual percent of difference in the two values varies between 10% and 14% from 1998 through 2007. The 2008 average home value was down to $678,484. The median sale price was $577,467. These county wide numbers do not reflect the dramatic differences in various areas: Watsonville prices, for example, were down about 40%+, while Santa Cruz westside & Scotts Valley were down between 10%+/-. Also, the graph does not show the reality of a two tiered market that is "outside of the model." Check out the section below entitled, When Will the Housing Market Turn Around (Click Here), for more insight into the current market by MLS areas.

2009 Housing Forecast
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Current Interest Rates
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Recent Multi-Res Sales & Pendings Comparison
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by distress & foreclosures sales, are removed from the analysis, the median sale price range was $540,000 to $755,000.

Watsonville homes have lost 60%+/- of their peak value; Felton, Boulder Creek & Ben Lomond about 40%, while the rest of Santa Cruz County has lost between 10% & 31%.

To view a detailed countywide average and median price change study, including the number of sales & number of REO & short sales per area, Click Here.

A March10, 2009 Price Change analysis revealed the following:

As noted above, the median Santa Cruz County sale price in 2005 was $754,055; in 2006 it was $744,409; in 2007 it was $757,603.

Since September 1, 2008 there have been 536 closed sales in Santa Cruz County. The median sale price, depending on the area, ranged from $364,500 to $755,000. However, if Watsonville and the San Lorenzo Valley, areas hardest hit

When Will The Housing Market Turn Around?

A generally accepted forecasting model is that the number of months of housing inventory existing on the market at a point in time is indicative of the strength or weakness in the housing market. Historically, the number of months of inventory that indicates a stabile market is 6 to 8 months. Less than 6 months indicates there will be upward pressure on prices. And more than 8 months indicates there will be downward pressure on prices. However, according to Richard Greene, Economist and Professor of Real Estate Finance, as reported in the California Association of Realtors magazine, February 2008, "we are outside the model." "The key statistic to watch is the months supply of homes available for sale. When that number starts shrinking, the bottom is coming."

The data below shows the current # of listings & pendings per each Santa Cruz MLS area March 1, 2010, & the total # sales in February. Then shown is the months supply of homes based on the total no. of listings on March 1, 2010 divided by the no. closed sales in February. Also shown are the # of new listings & homes taken off market in February. The net inventory change for the month is figured by subtracting closed sales & off market homes from the # of new listings...This data doesn't include the rural areas of SC County (except SLV) or Adult Village in Watsonville. This info is updated monthly.

Considering the above mentioned housing model & the following summary analysis most Santa Cruz area prices would be rising. However, as stated above, this market is "outside the model." For the first time in the past 30+ years, there is a two tiered market. The first tier consists of prime, desirable properties. This tier of properties has had modest price declines, with small changes in value for some prime properties (near the beach or University). The second tier, due to location, condition or other negative factors, are the lesser desirable properties. They have had losses in value of 25%-60%, with Watsonville down about 60+/-%. The second tier consists mostly of pre-foreclosure, post-foreclosure and distress sale properties. These properties are selling about 20-25%% below the first tier homes. The first tier group made up about 30% of sales in the past few months. Foreclosures & distress sales made up the other 70% of the sales. except in Watsonville and the SL Valley, the second tier prices are prevalent in 90%+/- of all sales. See the Price Change Study. (Click Here)

MULTIPLE RESIDENTIAL PROPERTY ANALYSIS

The multiple residential market had consistent value increases from 1995 through 2005. Those years, with the exception of 2004, also had rental rate increases for both 2 bedroom and 3 bedroom apartments and condominiums. However, the rate of increase in rents and the rate of increase in sale prices were not proportionate. For example, from 1998-2001 rental rates increased by nearly 30% for 2 bedroom units and 34% for 3 bedroom units, while sale prices increased by 40% to approximately 58% depending, mostly, on the number of units in the sale. In 2005 through 2007 rents were stable to slightly up while sale prices ranged from +4% to approximately -12%, depending on the number of units. The larger, higher priced units suffered the greatest loss in value during this period. This suggests that the most important factors in the value of larger multiple family residential properties in Santa Cruz are investor expectation of rent increases and/or value appreciation during the projected holding period...However, tax shelters for other income, and monthly income, especially during retirement years, are important factors...And, in Santa Cruz there has typically been, until 2009, yearly rental income growth, largely as a result of UCSC enrollment increases. Freshmen and transferring students submitted 33,000 admissions applications in 2008, an all time high for UCSC, up nearly 14% from 2007.

This chart displays the average and median list prices of multiple family residential units, in Santa Cruz, Capitola and Soquel, as of August 1, 2008.

There are 27 duplex units for sale. Two are in beach locations with $2 million+ list prices. They skew the duplex prices upward. The prices range from $599,000 to $2,390,000. The average time on market is 134 days.

There are 9 current triplex listings. They range in list

price from $490,000 to $1,975,000. The average time on market is 147 days.

There are, as of 8/1/08, 7 fourplexes on the market. They range in price from $1,090,000 to $1,445,000. The average market time is 125 days.

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All charts and data were developed by Rick Wilkins & Associates. All information is believed to be accurate, but is not guaranteed. This information is updated monthly, quarterly or semi-annually when appropriate. Do not rely on this information alone for making important business decisions. Reproduction of this information is not permitted without written authorization of Rick Wilkins & Associates.

Multiple Residential Activity - Past 23 Months and 6 Year Comparison

The first box below contains a list of all multiple residential properties that have sold and closed escrow from January 21, 2008 through March 3, 2010, in Santa Cruz, Soquel, Capitola, Scotts Valley and Aptos. The second box contains all pending sales in the same areas as of March 3, 2010.

Sold Multi-Residential Properties

Multi-Residential Pending Sales

5 Year Price Comparison

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The box to the right contains a comparison of the number of sales and the median and average sale prices of multiple residential property sales and pendings in Santa Cruz, Capitola, Soquel, Scotts Valley and Aptos. The data is

from September 15, 2003 to March 15, 2004 and the same time period in each of the years up to 2008-2009 are compared. The last row of data represents all current multi-res pendings as of October 31, 2009.

The above charts show that prices rose dramatically from 1998 through 2006, then the number of sales turned down but the direction of the median and average sale prices has been inconsistent. On closer analysis it is clear there are several significant factors to consider. One is the number of units per sale. The higher the average number of units per sale the higher the average and median prices are likely to be. Further, the average number of bedrooms per unit is significant.

The average number of units per closed sale from September 15, 2003 to September 15, 2006 ranged from 6.18, in the earlier years, to 3.2 more recently. From September 15, 2006 until March 15, 2008 the average number of units per sale was 3.48 units. From April 24, 2003 to April 24, 2006 there were 26 complexes of 10+ units offered for sale. Sixteen sold and 9 expired unsold. In the past 2 years till April 24, 2008, there were thirteen 10+ unit complexes offered for sale. Seven have expired unsold, 3 sold and 3 complexes were being offered for sale.

Also, the locations of the sale properties can influence the median and average prices. Multiple residential properties are found in the most desirable beach oriented neighborhoods, in desirable neighborhoods and in the least sought after neighborhoods. A triplex, for example, could sell for as low as the mid $600,000's in some locations and for well over $1 million in the most desirable locations. And, as always, but especially in the current market, properties with a negative location impact, or other negative factors, such as significant deferred maintenance, are very likely to suffer a greater percent of loss in value than properties without negative factors.

The smaller unit properties, which are sometimes purchased by an owner occupant, and more often by less active investors, mostly duplexes, triplexes and fourplexes, in all quality locations, make up a larger than typical percentage of the 2007-2009 market. The smaller and lower quality properties are generally pulling the price direction indicators down. Therefore, while the direction of the median price of properties that have sold, or are pending, is inconsistent (the average price being somewhat more inconsistent), price direction indicators alone provide some overall market insight, but do not provide information for adequate valuation of specific multi-residential properties.

The data also suggests experienced multiple residential buyers, as the relationship between cash flow and price appreciation is not as favorable at this time, are less active or are looking for lower rent multipliers and higher cap rates to compensate for price appreciation projections over the holding period of the investment.

Contact Rick for a property specific analysis, including Rent Multipliers, Cap Rates & Return On Investment Rates

Real Estate Investment Tax Information

Tax Shelters

This section contains basic tax information for properties held for investment, not for a personal residence or a second home. For all information on this site related to tax or legal issues, be sure to verify with a tax or legal professional how to apply any and all tax or legal information to your particular circumstances.. Do not rely on this information as a sole source of information to make your personal tax or legal decisions.

All of these tax tips are current and in effect at the time of this writing. However, as with all matters tax-related, verify with your tax advisor before attempting to use them – many, typically hundreds, of changes to the tax law come out of Washington every year.

The effectiveness in protecting income from taxation is the true test of any tax shelter. Most real estate is purchased, at least in part, because of the tax benefits that accrue for the owner. Ownership of real estate can produce substantial tax savings that can transform a fair investment into a very good one. The goal is to protect large amounts of income – accruing from the property itself or from other sources – from taxation. Investment real estate can be very effective at doing this.

*Operating Expenses...Operating expenses include management fees, maintenance and repair expenses, utilities, advertising costs, property taxes, mortgage payment interest, insurance, real estate commissions, travel expenses to and from the property, legal and accounting fees, etc. These expenditures are deductible from rental income and can therefore reduce your tax liability.

Operating expense deductions that are available for most real estate investments include the following:

*Mortgage Interest Payments

*Property Taxes

*Insurance

*Maintenance

These operating expenses, costs of owning an investment property, can be deductions against other taxable income in the year the expenses are incurred.

*Depreciation...Depreciation is a "paper loss" required for estimated wear, tear and obsolescence. Residential income property is depreciated over 27.5 years on a straight-line basis. Commercial property is depreciated over 39 years, also on a straight-line basis. Depreciation deductions are currently limited to $25,000, or less, against active income, depending on the tax payer's Affective Gross Income, but are unlimited against passive income. There are no deduction limitations against the active income of qualified real estate professionals. Passive loss deductions, such as depreciation, are not allowed against passive income generated by a limited partnership interest or a TIC investment. Consult a tax professional for more info.

*Capital Improvements (to the property)...Capital improvements are not deductible against income but increase the basis (purchase price plus improvements) in the property, which effect taxation at the time of sale of the property, whether there is a capital gain or loss.

The 1031 Tax Exchange

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For real estate investors, the 1031 tax exchange is a powerful method of deferring taxes from the sale of real property. Generally, if you exchange business or investment property for other like-kind property, then no gain or loss is recognized for tax purposes. If, as a part of the exchange, other property is received that is not of like-kind (also known as boot), gain is recognized for taxation purposes based on the value of the other property and/or money received. The proceeds of one property can be used to purchase a single or multiple properties, or vice versa; the proceeds from the sale of an office building, however, may not be used to buy a personal home without the levying of capital gains. A 1031 tax exchange requires the use of a third-party entity, also known as a qualified intermediary. This entity performs the same duty as an escrow company, but only where the exchanging of money is concerned. When a property is sold, the funds from the sale are transferred directly to the qualified intermediary. The intermediary then uses the funds to purchase the property which completes the exchange. Any unused funds become subject to capital gains taxes.

The IRS imposes strict time limits on the completion of 1031 exchanges. From the date of sale of your original property, you have 45 days to identify a new property or properties and provide written notice to the qualified intermediary. Once identified, you then have 180 days from the date of sale of the original property to close on the new property.

Email: Rick@RickWilkins-re.com

Office 831-464-3606

Senior Real Estate Specialist