This afternoon, I dropped off an executed purchase agreement to an area lender who was working with a buyer. While there, I took a few minutes to compare notes with the loan officer. We talked about the housing market in general, the tightening of requirements by underwriters, and our prospects of what 2008 will hold for the industry.
The talk came around to investors who are having the same problem that many homeowners are experiencing - time to refinance but there's not enough equity in the property with dropping values. Making it somewhat worse is that there are fewer recent solds to use as a basis for determining value.
A good rule of thumb for any investor is to critically examine a property's cash flow. Don't just think about the old PITI guidelines - Principal, Interest, Taxes and Insurance. Build in a vacancy rate in case you have turnover. If you have a single unit house, one month's vacancy is 8.3 percent for the year. Are you able to comfortably carry the payments without rental income for a month? How about two months?
Before you buy, do a rent survey to see what rent prices are working and how long it's taking to fill vacancies. Add a certain amount for routine maintenance, even if you require tenants to do things like lawn care and snow removal. And don't forget about start-up repairs or remodeling that you may have to do rent a home.
It's a wonderful time to buy investment properties, but keep cash flow as your number one goal. Number two should be likelihood of and rate of appreciation. Number three is a 'no-brainer' - the tax benefits you'll get from owning investment property.
By the way, we think that 2008 will see property values continue to drop (at least through mid-year) unless there is a strong stimulus to jog the economy. And another quarter point interest rate cut by the Fed won't qualify! Again, if you're looking to move up to a larger more expensive home, buy a vacation home or investment property, the first six months of 2008 should be that time.
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