Rates And Investment Properties

Investing in real estate, huh? All the infomercials finally gave you the bug, didn't it? Surely if all those funny-looking people sitting on a beach chair flashing fake $100 dollar bills can make money in real estate then you can too, right? But this week's column isn't about touting a proven method for investing in real estate. It's about if you're thinking of buying investment property then why you should do it now and not wait for your "How To Get Rich in Real Estate" cassette tapes to arrive in the mail. Why?

We're all aware of rock bottom rates. It's hard not to notice when nearly every other spam you get is wanting to refinance your mortgage. Is it getting all a little too redundant to read something like "Interest Rates at Historic Lows?" How many times can we make history, anyway? The problem with such headlines is that soon we become somewhat immune to the news. Low rates, yeah, what else is new?

But let me remind you of something. Way, way back, say two years ago, rates were in fact about 2% higher than where they are now. That can mean more than just a small difference in payment. It can mean whether or not your rental unit will ever cash flow and how much real estate you can buy.

Let's look at an example of a rental property selling for $180,000. It's rented, always has been. Great tenants. Shoot, the tenants even mow the yard and do minor repairs themselves. Property is immaculate. It's a nice little house and rent in the area for similar properties goes for about $1,500 per month. Now let's do some math.

A 30 year fixed rate in January of 2001 of 7.50% (yes, rates were very high back then) on a $150,000 note gets you a mortgage payment of $1,050 per month. You're showing a gross monthly profit of $450. Factor in hazard insurance and property taxes each month and maybe you're walking away with a couple of hundred bucks. Remember, these tenants do all the repairs and never complain.

Fast forward to today. A competitive investment rate could be found at 5.75%, the monthly mortgage payment drops to $878. This nearly doubles your net income. And this is a fixed rate for as long as you own the property. It will never change unless you tell it to.

Let's look at it another way. Instead of looking at that cute little house on the corner, you spotted a duplex closer to the college campus. A 2% increase in interest rate erodes your buying power. How much? By nearly 20%, that's how much. If you can afford a $250,000 loan today and rates go back up to 2000 levels, you may only qualify for a $200,000 loan. That's huge. And that difference is something no Real Estate Investing Seminar can ever change.

Article continued at http://realtytimes.com/rtcpages/20030418_investment.htm

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