Real Estate Investing: The Power of Leverage

Posted on November 5, 2013 by Jessica

One question we get a lot is “how do I begin investing in real estate? Whether someone is considering a second home, a property to improve and sell, or a property to rent and hold, investors starting out need to understand the power of leverage.

Leverage is the term used when one may not have the cash on hand to buy something outright, so they borrow someone else’s money (usually a bank’s) to finance their investment. Certainly the loan is paid back with interest, but the asset purchased appreciates at the full amount of the investment regardless of what was borrowed.

Let us give you an example. Let’s say a new real estate investor wants to purchase a second home in our area at $200,000. He has 20% to put down, or $40,000. He borrows $160,000 from the bank at 4.5% interest for a 30 year fixed rate loan and he plans to rent out the home for $1,200 per month.

His principle and interest payment is $810 per month. Of course, this does not include property taxes or insurance, which can be estimated at another $233 per month. Additionally, it is smart to estimate repairs at least 1% of the home value – in this case $2,000 per year.

At first glance, it doesn’t appear that the math works in this property owner’s favor as he is looking at a net loss in this case of $10 per month! And that is assuming that the property does not remain vacant, need major repairs, and he handles the rental himself instead of involving a property management company.

Here is where the value of appreciation and cost of living come into play. Unless our investor refinances, his payments for the next 30 years will be $810 per month. However, during that time a number of other forces are at work. Rents rise each year. At an approximate 5% increase per year in rent, that $1,200 in income today will equate to $1,540 in five years. We can assume that property taxes and insurance might rise at that same rate, leaving our investor in a slightly better position monthly than his $9 net loss of five years previous.

Estimated Monthly Revenue and Expenses

Let’s take a closer look at the 10 year figures listed above. At a modest 5% appreciation, the property purchased today would be worth $329,402 in 10 years. If our investor decided to sell and walk away from the $453 in net profits per month, he could be looking at gross proceeds of $201,259 (as his loan at this point has been reduced to $128,143). This doesn’t take into account closing costs, but isn’t it amazing how $40,000 can turn into over $200,000 in a relatively short amount of time?

Additionally, savvy investors need to realize there is another perk of owning multiple properties -interest deduction on taxes. The mortgage interest paid on your home loans is tax deductible depending on how your investments are set up. In the example above, $7,147 is paid in interest on the first year alone which could result in big tax savings!

If you are interested in learning more about how to leverage your next home purchase or real estate investments, please contact us: Jennifer at (509) 947-5670 or Jessica at (509) 947-2230.

Why Invest In the Tri-Cities

Posted on July 30, 2013 by Jennifer

When buying any kind of real estate you want to make sure that you are making a good investment because you never know when you might need to sell it, whether that be a single family home, condo, or even raw land.

That being said we have all heard the expression location…location…location when considering a piece of real estate to invest in as if the location of the property is ideal, demand should always be high and therefore, will return a higher price than property in a not-so-desirable location. While this is absolutely critical there are a few other things to consider before making what could be a very smart or a disappointing real estate purchase. Although location is still at the top of the list, there are two other critical points to consider.

A real estate buyer or investor must also answer the questions “Who is buying?” and “What is the health of the community they are buying into?” These two factors are often overlooked but they are essential for making a wise real estate purchase.

An area like the Tri-Cities of Richland, Pasco, and Kennewick are perfect for many types of buyers – critical to note when deciding where to buy. The “Who is buying?” question is important because the more types of buyers that can buy in a particular area means there will be higher demand when you go to sell and that always equates into higher sales prices. The demand in Tri-Cities is high due to it being a great place to raise a family, start a new business, retire or purchase a second home, not to mention the wealth of recreational opportunities that abound. This is a wonderful recipe for high demand and higher sales prices.

The other thing to look at when buying is the health of the community. Variables to consider include:

Is the area growing?
Are the available jobs in the area tied to a variety of industries?
What natural resources are readily available?
Are the health care system and school systems highly rated?

According to the Tri-Cities tourism bureau, we have a strong school system, virtually no traffic congestion, growing health care, low crime rate and annual precipitation of less than seven inches. All of this along with its varied recreational activities and incredible weather makes it a perfect place to invest in real estate.

The Tri-Cities visitors and convention bureau says it best with their “Water, Weather and Wine” slogan. There is no question that the Tri-Cities is rich in each of these areas and makes it a very attractive investment location.

If you are considering investing in the area and would like additional information, please contact Jessica Johnson at Referred Real Estate at (509) 947-2230 or Jennifer Cowgill at (509) 947-5670.

Tri-Cities Real Estate Market Update First Quarter 2013

Posted on June 14, 2013 by Jessica

The National Association of REALTORS® has released their market statistics for the Kennewick-Richland-Pasco area first quarter 2013. Our area did see a modest increase in median home prices year over year (comparing quarter 1 of 2012 with quarter 1 of 2012) of 2.3%, putting our median home price at $181,700.

Nationally, median home prices rose 11.2% comparing quarter 1 2012 with quarter 1 2013, but remember, many areas of the country saw big declines between 2009-2011 and are still not back up to pre-recession levels. In fact, the National Association of REALTORS® also tracks “Housing Equity Gain” which reflects price appreciation over 3,7, and 9 year terms. The 7-year Housing Equity Gain for the US total is still -$40,867 although Kennewick-Richland-Pasco reports a 7 year Housing Equity Gain of +$29,700.

The below graphs indicate the snapshot of monthly inventory (number of homes on the market) for 2012 vs the first few months of 2013. Our inventory has remained fairly consistent with last year.

The below chart illustrates the year over year number of solds in the Tri-Cities comparing 2012 with 2013. The number of solds so far this year is 900, which is modestly above the 807 sold year-to-date in 2012.

Additionally, NAR tracks building permits. Compared to the previous year (which is actually a sum of the past 12 months of building permits issued), single family housing permits are up 28.4%. (as opposed to 25.6% nationally). This indicates construction is on the rise, which is an indicator that inventory levels have stabilized.

If you have questions on what these figures mean to you, please don’t hesitate to give us a call. You can reach Jennifer Cowgill at (509) 947-5670 or Jessica Johnson at (509) 947-2230.

Sources:

http://www.realtor.org/sites/default/files/reports/2013/local-market-reports-2013-q1/local-market-reports-2013-q1-WAKennewick.pdf

http://tcarmls.com/wp-content/uploads/2013/05/STATS-FOR-2010-2013-MEDIAN.pdf

Should I Buy a New Home?

Posted on February 5, 2013 by Jennifer

There are many things to consider when buying a home – should you buy something that has been lived in before or should you splurge and buy something new? New homes are usually more expensive than their resale counterparts, but is it worth it?

Aside from the possibility of being able to customize your new home with the finishes (counters, back-splash, flooring, and sometimes floor plan) and colors you like, buying a new home can actually save you money each month.

According to the National Association of Homebuilders, a home is considered “new construction” if it was built within the last four years. The NAHB recently cited the 2009 American Housing Survey in evaluating what homeowners spent on maintenance expenses per month. The survey found that 26% of all homeowners spent $100 or more per month on home maintenance expenses. But of the homeowners who owned a home classified as “new construction,” only 11% of owners paid this amount. What is a more startling figure? 73% of new homeowners spent less than $25 per month on maintenance.

So what about utilities? According to the survey, all homeowners spent about $.78 per square foot per year on electricity. This means for a 2000 square foot house, $1560 ($130/month) was spent on electricity. However, compare this with “new” homeowners who spent only $.65 per square foot per year ($1,300 per year or $108.33 per month for the same 2,000 square foot house).

A big difference was seen in homes with natural gas. Homeowners on average spent $.53 per square foot per year (for a total of $1,060 per year or $88.33 per month for a 2,000 square foot house) while owners of new homes paid $.38 per square foot per year ($760 per year or $63.33 per month).

And new homes that are ENERGY STAR® certified strive to be 30% more energy efficient than typical new homes. Using our example “new” 2,000 square foot home which could cost $1,300 per year in electricity, a comparable ENERGY STAR® certified home may cost $910 in electricity per year.

There are currently over 550 listings in the Tri-Cities which were built between 2009-2013 (classified as “new construction”). If you are in the market for a new home, an existing lovingly “used” home, or if you want to start completely from scratch and create something all yours, you owe it to yourself to learn your options and determine the best fit for you – and your budget. We can help! Please call Jessica at (509) 947-2230 or Jennifer at (509) 947-5670. We can show you all the costs and benefits of buying a used home versus buying a new home.