In our past article we reviewed productive ways to search for a condo in Mammoth. We suggested you connect with a local Realtor who has intimate knowledge of our market. Further we suggested that you find that Realtor by using the internet or looking for Realtors who advertise in the Mammoth Times. If you followed this advice, you probably found a great second home that you want to purchase.
The next step is for you and your Realtor to write an offer and eventually purchase that prefect home. When your offer is accepted, the adventure begins. But what are the economics of owning a condo in Mammoth? What does it cost to live the dream?
I will use an example of purchasing a unit in the Village. I have chosen this example due to the fact that it may represent the best "economics" for condo ownership in Mammoth. If you do not agree with me, try to put that aside for now, because the economics are the "message" here, not the debate on where is the best place to live in Mammoth.
Our purchase will be a top floor one bedroom unit in the Lincoln House for $550,000. We will be putting 20% down and financing the balance with a first trust deed in the amount of $440,000. Our unit will be in the rental program operated by Mammoth Hospitality, who is the in-house rental management company.
Let's review the expenses first, then the income.
Note: I am not offing tax or legal advice. Everyone has unique circumstances and the appropriate professional MUST be consulted. In addition ALL aspects of a real estate transaction are negotiable. There is no standard commission or cost item that is always paid by the seller or buyer.
EXPENCES
Escrow: Our example has escrow expenses such as zone disclosures, condo document fees, transfer taxes, title Insurance and ½ of the escrow fees paid by the seller. The buyer will pay the other half of the escrow fees and not much else. A general rule of thumb is that seller's expenses for overall escrow charges will be 1% of the purchase price and the buyer's expenses for escrow charges will be .5 percent.
Buyer Cash Out for Escrow: $2,750.
Loan: The loan you will have on the condo will be one of the highest cost items you incur. With 20% down in our example, we will have a loan of $440,000. Interest rates can vary dramatically based on your credit worthiness and willingness to pay points on the origination of your loan. We will assume that you have excellent credit. Your rate in today's market should be in the 6.5% range as an owner occupied property. If you were to purchase this condo as an investment property (non-owner occupied) or if you are using a 1031 tax deferred exchange, then the rate will be higher. I strongly recommend that you use a local Mammoth, lender. We have so many unique issues in Mammoth that out of area lenders are not aware of. Many deals start just fine then quickly fall apart as the out of area lenders muck them up!
Buyer Cash Out for Annual Interest: $28,600.
Association Dues, Insurance and Utilities: The Association dues for the one bedroom are $575 monthly. This fee covers the common area charges and most utilities. Electric is NOT covered by HOA so we will add $200 monthly. You need insurance on your unit called a condo policy that will run approximately $300 annually.
Buyer Cash Out For Association Dues, Utilities and Insurance: $9,600.
Real Estate Taxes: Real estate taxes in California per Proposition 13 should run 1% of the purchase price. Every County and City finds a way to increase that amount and Mono County/City of Mammoth are no exception. We will use 1.1% of $550,000 or $6,050.
Buyer Cash Out For Annual Real Estate Taxes: $6,050.
To summarize our Buyer out of pocket, we have Escrow of $2,750, loan interest of $28,600, association dues/insurance and utilities of $9,600 and real estate taxes of $6,050 for a total annual out of pocket of $47,000 or $3,917 monthly.
Buyer Cash Out of Pocket Annual Expense: $47,000 / $3,917 Monthly.
INCOME
The Village has an in-house rental program through Mammoth Hospitality. They are not the only rental agency you can use in the Village but for our example we will use the in-house rental service. The rent collected is split 50/50 with Mammoth Hospitality. We have three rental levels where the rate charged for a rental will vary seasonally with summer, winter and holidays. The chart below summarizes what could be a typical year for our condo.
Rental Program:
Summer Winter Holiday
Rental income per night $209 $327 $417
Available day per year 224 120 21
Occupancy rate 0.2 0.6 0.8
Total income $9,363 $23,544 $7,005
Mammoth Hospitality fee 0.5 0.5 0.5
Cash to owner $4,682 $11,772 $3,501
Total Cash To Buyer/ Owner From Rental Program: $19,955
We now have $47,000 cash out and $19,955 cash in for a net cash to Buyer/Owner of <$27,450> or <$2,289> cost monthly. We still need to overlay the actual loss incurred monthly to the tax code. Fortunately this will improve the monthly out of pocket due to the belief by our Government that ownership of rental property serves the public good. We will have depreciation on the building portion of the property, some if not all the interest paid, most of the expenses and taxes and other fancy tax stuff. (Now you know why I insist you consult professionals). Rule of thumb will be a further reduction of about 1/3 of the loss due to tax breaks. So in our example, your out of pocket after tax breaks will be <18,000> or <$1,500> monthly. This is a rough ball-park, but close.
Now you may ask, is owning a one bedroom unit in the Village worth spending $18,000 a year net of taxes? Personally, I think it does.
If we use a holding period of 5 years, we will have spent net of tax, roughly $90,000 in carry costs assuming costs and rents keep pace. How much does the unit need to go up in value to cover the $90,000 plus the cost of selling the unit at a future date?
We had a purchase price of $550,000, plus our 5 year carrying cost of $90,000, in addition to an estimated expense of $40,000 to sell the condo. The $40,000 is roughly 6% of the selling price with 1% as escrow expenses and 5% commissions to the Realtors. This would have a selling price of $680,000 in five years to break even.
The percentage gain required to break even is in the 24% increase range. Complied over five years that is roughly 4.8% per year. California has historically posted gains in excess of 5% per year. Remember, our boom years in Mammoth have posted gains in excess of double digits which are well above the 4.8% gains needed to keep pace.
No one can predict the future of real estate values. The decision to own a condo in Mammoth is a personal one. I do believe that making the decision to purchase, based solely on the numbers, "economics", is missing the point. Life is short. You work hard for your money. Shouldn't you come spend a little of that money with us and see just how sweet life can be?
David H. Schwartz
President ~ Broker
Mammoth Realty Center
All information is reliable but not guaranteed. Please consult profession for tax and legal advice. We welcome all comment and questions directed to David@MammothAnswers.com. This article is intended for informational purposes only. Please contact your local professional for more details. Mammoth Lakes Real Estate.
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