“CH-CH-CH-CHANGES!”

Just recently, I read an article in the local paper about how out-of-state investors have been buying up huge numbers of homes in Pierce County. This has never happened before…so what’s this about?

It’s about making money, that’s what! It’s all about doing business FOR A PROFIT.

Compared to the rest of the country, the cost of housing here in Pierce County is LOW and AFFORDABLE. Today, it’s still possible to buy a home here and immediately rent it out AT A PROFIT, even with a 10% down payment. Then, after holding it as a rental for a few years, it’s possible to sell it AT A PROFIT when the market peaks.

The investor receives the “double whammy” of RENTAL PROFIT while he holds it and EQUITY PROFIT when he sells it. So what does the future hold for what is going on here? Will the profits even end?

Yes, they will! Sorry to rain on the parade, but yes, CHANGE IS COMING, and what is just ahead is INCREASING HOME MORTGAGE INTEREST RATES that will eliminate the element of RENTAL PROFITS for recent estate speculators.

Rather than present you with a 1,000 word explanation, let me show you a “picture” instead…a chart showing how a rental investor’s monthly profit changes (vanishes) with increasing loan interest rates. Consider the case of a single family home bought as a rental investment in Peirce County, Washington:

  • 1,200 sq ft single level home (“rambler”)
  • 3 bedroom/2 bathrooms, 2 car garage, standard lot size, built in 1985
  • purchased for $200,000, 10% down payment, 90% conventional loan
Int. Rate Prin &
Int*
Taxes, Ins. &
Mntnce
TOTAL
Mo’ly expense
3% desired return
on dn pmnt
NET**
mo’ly rent
NET
mo’ly profit
3.25% (Was) 783 310 1143 50 1300 +$157/mo.
3.25% (Now) 833 310 1193 50 1300 +$107/mo.
4.5% (Soon) 912 310 1272 50 1300 +$28/mo.
5.5% (Later) 1022 310 1382 50 1300 -$82/mo.
6.5% (?) 1137 310 1497 50 1300 -$177/mo.

As you can see, a mortgage rate increase of just 3/4% will bring the “run-away freight train” of positive monthly cash flow to a halt….and all the recent financial news is pointing with certainty to rate increased ahead!

Once RENTAL PROFITS are gone, then all the investors will have left is EQUITY PROFIT when they sell their rental homes. Trouble is that hundreds of investors suddenly dumping THOUSANDS of rental homes onto the market will cause home values to go down…DOWN FOR EVERYONE.

Of course, none of this is truly a huge surprise because anyone who has studied the real estate market history at all knows that it is a CYCLICAL BEAST whose attractiveness as a financial investment fluctuates up and down over time. It is a curious “beast” though, for it is the only investment I know of that you can live it. Just try “living” in a bank CD, municipal bond or stock certificate!

 

*P & I payment on a $180,000 loan, 30 year term, fixed interest at the rate shown
** $1,395 market rent less $95 monthly management fee = $1,300 NET rent/month

 

 

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