Check the property’s capitalization rate
Question: Bob, can you give us a short answer on finding the best buys, and investing in income properties? This (especially in this down economy/real estate market) seems to be the time to buy, be it in the Cape or just about anywhere.
– Lori & Tom
Answer: Lori and Tom, here is as short and to the point answer I can come up with. To find the best buy among various income producing properties, check each property’s “capitalization rate.” This is more important than how a house or apartment looks or its location.
HOW: Divide each property’s annual net rent (the rent you could charge minus your expenses, such as tax, insurance and upkeep) by its fair market value.
Example: If you can charge $2,000 a month in rent and net two-thirds of that (about $16,000 a year) and the property would cost you $250,000 to buy, the capitalization rate is 6.4 percent.
Other things being equal, the higher the capitalization rate, the better the investment.
Question: We have been reading/hearing about all of the foreclosures and job losses. We are about to get into this kind of situation with expenses, should we refinance or?
– No Name.
Answer: No Name, that is a very good question. I can only (I hope) give you a good answer, especially in this economy.
Many homeowners have been rushing to refinance lately because interest rates have dropped sharply. Average fixed mortgage rates on 30 year loans recently are at the lowest in several decades and, and in some states below 5 percent. Trimming a single percentage point from a $200,000 loan can save a homeowner more than $1,500 per year. But it’s very difficult refinancing in the current tight credit markets.
What you need to know to get a new loan.
Do you qualify? In today’s environment, many homeowners who would like to refinance will not qualify for new loans because of declining home values. Home owners who owe more on their mortgages than their home is worth will not be able to refinance unless they can provide enough cash to rebuild their home equity. That means coming up with enough money out of their pocket to pay down the size of the mortgage so that the refinanced mortgage is well below the current, lower value of the home.
Most mortgage lenders now refuse to refinance mortgages for more than 90 percent of the current, depressed value of the property, and many will not exceed 80 percent. Expect private mortgage insurance (PMI) to be required if home equity is below 20 percent, which could add 1/2 percentage point to the loan’s costs for the initial years of the loan. If home values in your region are dropping (as most places are) quickly, some lenders might “discount” your home’s appraised value and require even more home equity – potentially 15 percent to 25 percent or more – before they will consider refinancing your mortgage.
The Web site Zillow.com can help you determine how much homes in your area/neighborhood similar to your own have sold in the past few months.
Mortgage rates fall
The average rate for 30-year fixed-rate loan from 2006 around 7 percent down, then back up to around the same in 2007, a big drop to around 5.5 percent, then back to around 6.7 percent, then in 2008 the biggest decline in many, many years to around 5 percent. Now in 2009, it couldn’t get much lower unless the economy completely fails?
Back again next week with more information possible refinancing. I hope everyone voted and the outcome was what they desired-this way you can have a stronger opinion.
Have a real estate question? Write, call, fax or e-mail:
Bob Jeffries, Realtor,
Century 21 Birchwood Realty Inc.
4040 Del Prado Blvd., Cape Coral, FL
239-549-5724 Office, 239-542-7760 Fax