|Six reasons to purchase income property now
This real estate market is continuing to produce many fantastic opportunities including an approach to purchasing income property that makes sense.
The six-reason approach is as follows:
• Low mortgage rates: Even for investment properties, continue to remain at a low rate, creating a favorable mortgage payment. It’s not uncommon these days to get a 30-year fixed rate mortgage for an income property purchase under 4 percent. The Federal Reserve’s commitment to buying mortgage bonds will keep rates favorable for such opportunities.
• High rents: In most markets, rents are up. Moreover, fair market rents can be used to offset the mortgage payment in qualifying for a potential mortgage loan. You will want to consult with both a real estate agent and/or a real estate appraiser depending on your market. In Sonoma County, rents are up, significantly.
• Cash flows: The property will likely cash flow with 20 percent down or more. For example, use these assumptions on a purchase price of $300,000: down payment of 20 percent equals $60,000; the mortgage loan is $240,000; the interest rate is 3.857 percent; mortgage principal and interest ($1,126.51); monthly property taxes based on 1.25 percent of purchase price ($313); monthly homeowners insurance ($67); total mortgage payment ($1,506.51); closing costs based on 3 percent of the purchase price $9,000); total cash needed ($69,000); gross rents ($1,900); and net cash flow ($393.49 per month.
• Return on investment: Using a cash on cash return-annual income at $293.49/month translates to $4,721.88 per year in rental income. Divide $4,721.88 by the initial capital of $69,000, this translates to an annual return of 6.8 percent conservatively. Be mindful of the fact a principal and interest fixed rate mortgage is building equity over time by the reduction in your principal balance further improving your return.
• Tax deductions: Mortgage interest, property taxes, homeowners insurance – each one of these can be deducted on your federal income tax return. Additionally, you’ll be eligible to write off any repairs you do to improve the property in that calendar year such as painting, interior decorating etc. Contact your tax advisor for further clarification.
• Appreciation: Prices are up nationwide and continue to move upward. The U.S. labor market is also improving. As more people find jobs, real estate tends to rise in succession. Inventory shortage is creating bidding wars driving prices up.
Where to begin income
Determine how much risk versus how much reward and how much cash can you invest? Remember, you’ll need 20 percent down or more to purchase an income property. Talk with a local mortgage lender upfront to make sure you can qualify for financing by getting pre-approved.
Also, get connected with a real estate broker because you will want to make sure rents in the area make sense for your unique purchase. Decide how much return you’re looking for, given your appetite for risk and what’s realistic for your area.
Buying income property is first about the numbers. Ask yourself if the math makes sense? If it does, consider it, if it doesn’t, walk away.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.