Why Income Property?
Why Invest in Income Property?
· Unlike a home or
personal residence, the intrinsic value of any income property is its'
fundamental ability to generate income. In addition, imagine
being able to own an asset where the bank is typically willing to finance 90%
of it, the tenants pay the monthly mortgage for you, yet you reap all of
the benefits such as a growing income stream, future appreciation, and
potential tax advantages. As for risk,
once the net cash flow crosses above the breakeven point, and unless you
elected to sell at a very inopportune time, an investor is virtually assured of
a positive outcome over the long term.
Last, but certainly not least, income property allows you to take full
advantage of the extremely powerful investment tool known as "financial
leverage". (more on this later!)
A Historical Perspective
· We know that over the long
term real estate prices in California have appreciated
approximately 6-7% on an annualized basis. As with virtually
any investment, however, seldom is it a smooth ride all along the
way. The good news is that real estate rarely, if ever, plummets suddenly
and severely downward like the stock market did in 2000. What California real estate does tend
to do in a down turn is either back-track moderately by 5-10%, or possibly just
sit idle for a period of time. For example, Orange County’s worst slide ever
was -13.6% from 1990-1995. Interestingly
enough, this was followed immediately by a 51.0% gain over the
subsequent 5 year period! If you've been
a homeowner for any length of time, I'm sure this all sounds familiar and that
you've been through these types of market adjustments before.
Why Buy Income Property Today?
· Certainly no one can
argue that real estate prices in the California market have escalated
pretty dramatically over the last 6-7 years. Understanding that, we always
counsel those investors who may be interested in quickly “flipping” a property
to proceed with caution. Does that mean it's a bad time to invest in
income property? No, not at all, and certainly not for the investor
who is willing to be a bit more patient.
· There are typically
four primary components to an income property investment . . .
the price of the property, property taxes / expenses, rental income, and
the mortgage. In reviewing these key variables, here’s what we know
today; property prices have indeed increased, taxes & expenses are
relatively stable, and the local economy strong and growing. In addition, rents are currently on the rise
and the demand for apartments is presently outstripping supply. As for
mortgages and interest rates, read on!
Interest Rates – Then and Now!
· Despite recent
increases, the current Prime Rate of 8.0% is still at a very moderate
level historically. Believe it or not,
the Prime Rate in December of 1980 was at 21.5%!
· 30 year fixed rate
mortgages, currently around 6.625%, are still at some of the lowest rates in
· The current Monthly
Treasury Average (MTA), commonly used as an ARM index, is at 3.62%, the lowest
it has been since April of 1964!
FYI, the MTA forecast for year end 2006 is 4.51%, for year end 2007 it
What do all these
numbers mean? Well, if you’re currently
standing on the sidelines waiting for property prices to decline by
10%, consider what your monthly payment might look like if mortgage
interest rates were to rise to 7.625% while you wait. (Many analysts are predicting higher!)
The monthly payment on a fully amortized $500,000 loan at 6.625%
for 30 years = $3,202
The monthly payment on a fully amortized $450,000 loan at 7.625%
for 30 years = $3,185
As you can see, cash
flow wise, a 10% price decline could easily be neutralized by a corresponding
rise in interest rates.
So, What Should You Do? We would suggest that there is never a bad
time to invest in real estate for the long term investor and that now is as
good a time as any. And, as you should
always do before committing your hard earned dollars to anything, do your
homework and seek good counsel . . . preferably from a CA Income Property Specialist!
Bottom line . . . don’t wait to buy Real Estate, buy Real Estate