1. Low Mortgage Rates– even for investment properties, continue to remain low creating a favorable mortgage payment. It’s not uncommon these days to get a 30 year fixed rate mortgage for an income property purchase are in the 5% range. The Federal Reserve’s commitment to buying mortgage bonds will keep rates favorable for such opportunities.
2. 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, California, rents are up, significantly.
3. Cash Flows– The property will likely cash flow with 20% down or more.
For example use these assumptions:
- Purchase price $150,000
- Down payment 20% =$30,000
- Mortgage loan= $120,000
- Interest rate 5.000%
- Mortgage principal and interest $644.19
- Monthly property taxes (based on 2.23% of the purchase price) $279
- Monthly homeowners insurance $100
- Total mortgage payment $1023.19
- Closing costs ( based on 3% of the purchase price) $4500
- Total cash needed $34,500
- Gross rents $1500
- Net cash flow + $476.81 per month
4. Return On Investment– using a cash on cash return-annual income at $476.81/month translates to $5721.72 per year in rental income. Divide $5721.72 by the initial capital of $34.500, this translates to an annual return of 6.9% 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.
5. 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.
6. Appreciation-prices are up nationwide and continue to move upward. The US 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.