Why Income Property?

Why Invest in Income Property?

·      Unlike a home or personal residence, the intrinsic value of any income property is its' fundamental ability to generate income.  In addition, imagine being able to own an asset where the bank is willing to finance 80-90% of it, the tenants pay the monthly mortgage for you, yet you reap all of the benefits such as a growing income stream, future appreciation, and potential tax advantages.  As for risk, once the net cash flow crosses above the breakeven point, and unless you elected to sell at a very inopportune time, an investor is virtually assured of a positive outcome over the long term.  Last, but certainly not least, income property allows you to take full advantage of the extremely powerful investment tool known as "financial leverage".

A Historical Perspective

·      We know that over the long term real estate prices in California have appreciated approximately 6-7% on an annualized basis.  As with virtually any investment, however, seldom is it a smooth ride all along the way.  The good news is that real estate rarely, if ever, plummets suddenly and severely downward like the stock market did in 2000.  What California real estate does tend to do in a down turn is either back-track moderately by 5-10%, or possibly just sit idle for a period of time.  For example, Orange County’s worst slide ever was -13.6% from 1990-1995.  Interestingly enough, this was followed immediately by a 51.0% gain over the subsequent 5 year period!  If you've been a homeowner for any length of time, I'm sure this all sounds familiar and that you've been through these types of market adjustments before.

Why Buy Income Property Today?

·      Certainly no one can argue that real estate prices in the California market have escalated pretty dramatically over the last 6-7 years.  Understanding that, we always counsel those investors who may be interested in quickly “flipping” a property to proceed with caution.  Does that mean it's a bad time to invest in income property?  No, not at all, and certainly not for the investor who is willing to be a bit more patient.

·      There are typically four primary components to an income property investment . . . the price of the property, property taxes & expenses, rental income, and the mortgage.  In reviewing these key variables, here’s what we know today; property prices have indeed increased, taxes & expenses are relatively stable, and the local economy is strong and growing.  In addition, rents are currently on the rise and the demand for apartments is presently outstripping supply.  As for mortgages and interest rates, read on!

Interest Rates – Then and Now!

·      Despite recent increases, the current Prime Rate of 8.25% is still at a very moderate level historically.  Believe it or not, the Prime Rate in December of 1980 was at 21.5%!

·      30 year fixed rate mortgages, currently around 6.50%, are still at some of the lowest rates in years!

·      The current Monthly Treasury Average (MTA), commonly used as an ARM index, is at 4.28%, the lowest it has been since January of 1966!  FYI, the MTA forecast for year end 2006 is 5.07%, for year end 2007 it is 5.24%.

What do all these numbers mean?  Well, if you’re currently standing on the sidelines waiting for property prices to decline by 10%, consider what your monthly payment might look like if mortgage interest rates were to rise to 7.5% while you wait.  (Many analysts are predicting higher.) 

®   The monthly payment on a fully amortized $500,000 loan at 6.5% for 30 years = $3,160

®   The monthly payment on a fully amortized $450,000 loan at 7.5% for 30 years = $3,146

As you can see, cash flow wise, a 10% price decline could easily be neutralized by a corresponding rise in interest rates.

So, What Should You Do?  We would suggest that there is never a bad time to invest in real estate for the long term investor and that now is as good a time as any.  And, as you should always do before committing your hard earned dollars to anything, do your homework and seek good counsel . . . preferably from a CA Income Property Specialist!

Bottom line . . . don’t wait to buy Real Estate, buy Real Estate and wait!