Part 3 of 4

Starting in the year 2000, California was infected with appreciatation rates of 10 to 20% per year. This “Gold Rush Fever” spread worse than the bubonic plague.

Fourplexes were not immune. Their appreciation was the same with the added bonus of having rental income. The rents would cover a good portion of the mortgage payment. The owner covered the rest. Why? If the owner paid $30,00 over a year yet could sell the property for $80,000 more than he bought it, most people would agree it was a good trade.

But something happened. The fever broke. The market changed. Rates of appreciation were no longer 10% . . . more like -3%. Foreclosures started increasing; Lenders went into seizures; Twinkies went Low Fat.

Complete chaos.

Just like homeowners who are over-leveraged, fourplex owners find themselves in the same position. Selling is not an option; raising rents further is impossible. Each month is thousands in negative cashflow.

And that’s not all Chuck. What else do we have for our departing contestants?

Tax time.

Every April of every year, the Bermuda Triangle of the financial world appears. This vortex sucks in billions of tax dollars Not only income taxes but also property taxes. Even if the investor is lucky enough to break even on income taxes, property taxes don’t go away. One percent of the purchase price. In this area, fourplexes were sold around $900,000.

If the sucker investor purchased the 4-plex right at the beginning of the market change (2006), they would have paid tens of thousands per year just to keep the property. Add nearly ten thousand per year for property taxes. Year after year. Tens upon tens of thousands of dollars.

Where is this leading? Fourplexes in foreclosure. When checking the MLS last week, dozens upon dozens just sitting on the market. Investors anxiously trying to get rid of them before hunting season - ummm I mean tax season.

Sometimes I get those two confused.

The glut of supply has driven down prices. But this has had zero impact on rents. More on this tomorrow.

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