Don’t Fear Real Estate Investments
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The potential to make returns on real estate investment is there. However, many have opted not to take advantage of the great deals available on the market due to the fear that prices will continue to drop and thus, the value of their newly purchased property will decline as well. Is this something to fear about and in turn, not take advantage of the potential profits that this market has to offer?
Let’s see a case in point. A 1,100 sq. ft., three bedroom and one bathroom home costs $60,000 to purchase. The place has been renovated and the tenant currently living there pays $700 for rent each month. At 20% down, the buyer will still make an annual profit of more than 15%, if the tenant continues to rent out the place. However, if the property is left vacant, the buyer would still make more than 10% profit annually after he/she pays the monthly mortgage and pays for any maintenance that needs to be done. Yet, the possibility that the value of the property will decline significantly still lingers in the mind of the investor.
Let’s consider another scenario that may help subdue the fear of purchasing real estate. When there is a demand for a product, prices doesn’t fall. That is simple economics. Let’s say that the tenant who currently lives in the home decides to buy the same house at the same value, $60,000 and puts down a down payment of 5%. He secured a Federal Housing Association (FHA) loan at an interest rate of 5.5%. With a 5% down and an interest rate of 5.5%, his mortgage each month now is 38% less (approximately $436) than the $700 rent he paid before. The tax deduction that he receives on his interest and his property taxes increases his savings even more! Thus, it would be more ideal for the tenant to purchase rather than rent. So, why is he still renting? For many buyers, coming up with a down payment and then getting approved for a loan can be discouraging. Lenders are becoming stricter with their rules and regulations and are scrutinizing every little detail during the process, given the high default rates in mortgage payments we have seen in the recent years. Thus, it has become more difficult for prospective buyers to get approved for loans.
With receiving up to $8k tax credit (10%) for 2009 property purchases, an initiative passed by the Obama administration, there are some benefits for first-time buyers. More importantly, the newly passed initiatives will increase the demand for sales and loans since there will be a big pent-up demand from potential buyers. And in turn, the demand will stabilize prices, which will lead to an increase in prices and values of properties once again. Thus, first-time buyers should not be intimidated to invest in real estate.
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