Real Estate Cash Flow
Reduce Long-Term Loan Expenses With A 15 Year Mortgage
For as low as 30-year fixed rate mortgage rates are in Arizona today, 15-year fixed rate mortgage rates are even lower, and these lower rates can help you increase your properties return to you over time.
Going by Freddie Mac’s mortgage rate survey, the average 15-year fixed rate mortgage rate is now 3.27% nationwide with an accompanying 0.8 discount points. 1 discount point is a closing cost equal to 1 percent of your loan size. That is a large difference.
The current 15-year fixed rate reading is just one tick above the all-time, 15-year fixed rate mortgage low of 3.26% set in 10 / 2011.
If you’ve ever thought of “going 15″, it’s a terrific time to talk to your lender.
The primary benefit of using a 15-year fixed rate mortgage as opposed to a 30-year fixed rate one is that a 15-year fixed rate mortgage dramatically cuts the long-term interest costs of your loan. The downside is that monthly payments are relatively large.
At today’s mortgage rates, per $100,000 borrowed :
- 15-year fixed rate mortgage : $704 principal + interest monthly
- 30-year fixed rate mortgage : $477 principal + interest monthly
So, for many investors opting for a 15-year fixed rate mortgage, the monthly principal + interest payments will be 48% higher compared to a 30-year fixed rate mortgage of the same loan size, with less going to interest and much more going to principal.
Long-term, however, because the 15-year fixed rate mortgage interest rate is lower and because it pays off in half the time of a 30-year loan, a homeowner will save $45,000 in interest costs per $100,000 borrowed.
$45,000 per $100,000 borrowed is a significant amount of savings.
But the 15-year fixed rate mortgage is not the best for everyone.
Because it requires higher monthly payments, a 15-year fixed rate mortgage may add stress to your household budget. Furthermore, once you commit to a 15-year loan term with your lender, you can’t revert back to a 30-year loan term without a refinance and refinances can be costly.
Therefore, be sure of yourself when selecting a 15-year fixed rate loan. The rewards are great, but the risks can be, too.
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Lower Phoenix Prices Mean More Real Estate Investments Make Sense
With the readjustment of home prices to more affordable levels and steady rental rates real estate investing is making more sense as an investments rather then speculation.
Real estate IS a good investment when made prudently. It is a good investment when made for the right reason. You can make money in real estate with speculation but with speculation comes risk and that is something many of us are averse to and it really does not make sense for most people.
Take a look at the annual appreciation rates by city in Greater Phoenix since 2001 . This is a short period of time but it’s not a one year or a few month hold. Despite the carnage out there if you purchased in 2001 your appreciation rate is still rather good. If you purchased even earlier it’s good.
On average in Greater Phoenix it’s been about 5% over the last few decades. I won’t say it will be that but: it may be negative for a year or two more and it may be flat after that but at some point normal inflationary pressures will resume and even if you get 3% it’s good when you’re leveraged, that of course is in addition to cash flow which will increase your real return and cumulative wealth.
We are seeing prices at 40% to 50% below peak -which was an excess- in some places and often prices below current normal market trends. These are mostly outlying cities and neighborhoods but these are often newer communities that are very attractive to residents and tenants in common. This drop in pricing has occurred while rental rates are stable: it is easy for a landlord to find homes that will "cash flow".
And it is these magic two words "cash flow" that makes real estate such a wonderful wealth building product.
A $110,000 home can rent for $950 competitively: That means that with a normal down payment that property will cash flow and provide a decent return for the investor. This is not an anomaly it’s quite normal now.
Investors still need to pick investment homes using certain criteria which will better their re-saleability in the future.
Would you like to see examples of such homes? Contact us and we’ll send over a selection of homes that can make good rental investments that will cash flow. Sometimes these may need as little as a few thousand dollars in repairs but sometimes a bit more: on average $5,000 will do wonders. Put a good home together with a competitive rental rate and you’ll be more likely to attract good tenants for the long term and built wealth with little risk.
original post at PMT
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Phoenix Investment Properties: Small Multifamily or Single Family Homes
Question: Should I be investing in single-family or multifamily properties in the future?
Answer: The answer really depends on your goals and it would be different depending on which point in the market cycle we’re in.
What is your goal? Is it cash flow: appreciation: a combination of the two? Then of course, what type of investor are you? Short term speculator or long term passive income investor?
When the market was rapidly appreciating or even if it was appreciating at a steady pace then single family homes may be a better investment. In such a scenario you’re giving up cash flow completely and often adding to the property on a monthly basis because in an appreciation market you will rarely get any sort of cash flow: people are buying homes and the home rental market is usually not as good. You hope to make your money by realizing the gain in appreciation.
While this can work an investor has to be on top of the market trends because a change in the cycle can quickly diminish the return or make a home more difficult to sell.
In a stale market like we are in now an investor can purchase a home, lease it and realize a small cash flow but you’re still hoping for some king of appreciation to realize a solid return.
Small multifamily properties follow different market rules and serve a different purpose but any building up to 4 units does take on some of the characteristics of a single family home. Small multifamily properties, in general, do not change hands as often as homes because there is a smaller pool of buyers for them and they are usually purchased for long term cash flow rather then short term price speculation. It’s rare that a family will buy a multifamily property to occupy.
Where a single family home and multifamily property up to 4 units are similar is in financing. Financing for both is in general similar or was similar. In both cases a buyer can receive conventional residential financing with very similar interest rates.
But to get to the point. If your goal is to create a stream of passive income then your more likely to achieve such a goal with a multifamily property then a house. A multi-family’s purpose as an investment is cash flow and not appreciation. Of course appreciation is expected but it often depends on the rental rates because this is a business: as the business generates more revenue the value grows and vice-versa.
In the current market more people are renting because financing is difficult to obtain in it will be even more difficult in the next few years as the financing markets readjust. Multifamily property prices have corrected as well. they are down from the speculative heights.
What is it that your are after in real estate: if it’s cash flow then you’re more likely to get it with a multifamily property.
Other things to consider:
A single family home and multifamily are still different beasts. In a fourplex you have more people to deal with, 4 kitchen vs. 1, at least double the amount of bathrooms and 4 heat-pumps, 4 water heater, more pipes and just more of everything so the risk increases. Management is different as well. A multifamily property is truly a business, much more so then a single family home.
There is no easy answer to the question first posed. It can only be answered through a thorough discussion of your goals and tolerances. One of the better solutions is to have both types of properties.
Call us if you would like to discuss your options. We have direct and indirect experience with both types of investments over 10 years and we’ll be glad to share what we learned.
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