One of the most popular townhouse-style condo developments in the South Bay Area is Fusion by O’Brien Homes.  Offering some of the lowest prices for new homes in Sunnyvale, it’s quite understandable why demand has been red hot.  Indeed, prices are competitive even with much older homes in the area with outdated finishes, which is one of the main reasons why my clients recently purchased a home there.  They’re now very happy homeowners and are really enjoying their new tight-knit community.Still, the marketing team at Fusion aren’t resting on their laurels with the current strong homeowner demand.  They’re now playing the value card.  For the first time that I can remember, they’re actively trying to promote the investment potential of their homes to property investors.  Since I work with investors, I wondered if it’s actually true.  So, I ran some numbers to compare.

Based on their calculations, the monthly payment on a 2-bedroom unit with 25% down payment would be about $2054 a month while a similar rental unit would run $2776 a month, yielding a pre-tax income of $722 a month or a 8% cash-on-cash return.  On that basis, it’s a marginally good investment.

Drilling down into their assumptions, the monthly payment is based on an investor buying the 1198 sqft 2-bedroom plan for $434,000 with no upgrades with a 5/1 ARM at 2.625%.

Compared to available rentals, it’s reasonable to assume no upgrades are needed.  However, the financing rate assumption is a bit too low.  For investors, lenders charge higher rates, closer to 4.125-4.5% for a 5/1 ARM.  So, based on an HOA fee of $282, property taxes of $452, insurance of $32, basic wear-and-tear maintenance of $75, and closing costs, the monthly cost of investor ownership is about $2400.

To determine the potential rental returns for Fusion, we have an ideal comparable right across Lawrence Expressway at Avalon.  Currently, similar sized apartments are available for $2240 based on their online price sheet for a 1126 sqft unit.  Since Avalon has single floor units, there’s no living space lost to the stairways, making a slightly smaller floor plan roughly equivalent in size.  In addition, Avalon offers a substantial list of amenities, including a heated pool and a large fitness center, that help off-set the relative age of the units as compared to Fusion.  This implies a rental rate of $2200-2400 is appropriate for a newer 2-bedroom unit at Fusion.

So, based on this analysis, an investor would break-even on a cash-flow basis with 25% down payment, not generate a 8% cash-on-cash return.  Of course, this is just my interpretation of current market data.  Even if the 2-bedroom units at Fusion can command $2776 for rent, the expected return is still just 5.0%.  Given alternative investment opportunities available in the area that can generate 12-20% cash-on-cash returns, the homes at Fusion are far better buys for homeowners (with tax deductions and lower rates) than investors.

But, if an investor were to have a more speculative approach, there’s a good amount of gains to be captured by buying into the community before the project is complete.  With each phase, the builder has the ability to increase prices by about 2-3%, just based on the relative attractiveness of being in a complete community.

Looking backwards a year, the units in the community have already gone up by 10-15% over the last 3 phases.   Now that we’re in the latter half of the project, there are only a few phases left.  So, a unit purchased today would be expected to go up 7-10% by the time the project is complete.

If you’d like to learn more about how the underlying calculations or would like to see other investment opportunities in the area, please contact me.