5 minute read
Q&A
What’s a rate buy-down?
That’s a great question! A rate buy-down is a fee that you can pay to obtain a lower interest rate. Sometimes rate buy-downs are simply part of the rate being quoted. We saw this recently with large rate hikes. At one point we saw quotes of a 30-year fixed at 6.5% with 1.5% in points. The “points”are the rate buy-down and the fee in that scenario is equal to 1.5% of the loan. So if your loan is $400,000 - the fee would be $6,000. In that scenario you’d have to pay $6,000 for the pleasure of your 6.5% interest rate.
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Other times, buy-downs are optional. An example of this would be in same as above but 7% would cost $0. If you do the math on that, it’s best to take the rate buy-down as you’ll win over time. However, if rates are going to go down, you may want to hold off on that and just go with the higher payment in the short term.
What is a good return on a real estate investment?
Fantastic question and will change depending on any particular investor’s needs. There are 4 streams of profit on any investment property. 1). Cash flow - typically the most prevalent and guarded. 2). Debt reduction - that’s right, you have a tenant paying down your mortgage. This is a nice addition to profitability but keep in mind you can only access this value if you sell or refinance - the debt reduction isn’t something you can go spend like cash flow. 3). Tax savings - yes indeed you get tax benefits with mortgage interest deductions, capital improvements and other odds and ends. A deep dive in this one will take an accountant. 4). Appreciation - another benefit that is substantial but you can’t access this value unless you refinance and pull cash out OR sell the property. Cash in pocket are cash flow & tax savings, while future gains are locked up in debt reduction or appreciation. So back to the question - what’s a good return? I don’t see many investors buying properties unless the annual cash on cash return is around 5%-10% of your down payment. We have seen that go down with rising interest rates and crazy high rental rates. But the goal isn’t to wait long until you hit the 10% cash on cash return range and I’m speaking here on residential properties. Commercial property is a bit different.
How have the rates impacted the market besides the obvious slow down of buyer activity?
Have you ever played the game whack-a-mole at an arcade? Yeah.. it’s kind of like that. One issue pops up after another.. After another.. After another. We’ve had buyer’s back out of their offers (on our listing/not our buyer) because they simply didn’t like their payment - and that was 8 hours after their offer was accepted and signed. We had one listing with an offer from an investor that backed out - they didn’t realize their interest rate was in the 7% range. In general, the rates went up so fast that some people weren’t prepared. We saw the lack of preparation with buyers AND realtors. Other changes affect the offer negotiations. We see offers below list price, adding in inspections and being able to negotiate inspection results! How about that for a change in pace for the last couple of years!
What’s the market going to do in 2023?
Well isn’t that the million dollar question!? I don’t think interest rates in the mid 6’s and 7’s are here to stay. I think they’ll go down by mid 2023. I follow Barry Habib (mortgage guru) and his prediction is rates in the low 5’s and maybe below 5% by the end of ‘23. We’ll see. That seems hopeful but I do agree with the analysis that inflation has peaked this fall and that should start to go down. Recessions (if we do hit one) means a drop in interest rates as well.
Can a seller back out of a home sale before closing?
Yes, although very unusual to see this and have only had to manage that a couple of times in my career. Typically that doesn’t go well for a seller if they default prior to a closing. The buyer may be entitled to liquidated damages and in the end, the seller may be forced to sell. Liquidated damages could include housing, moving expenses, storage expenses and so on. If it’s a true default by the seller, it can get expensive for them and in the end, forced to sell. That’s why we don’t see that very often.
What’s on Joe’s Christmas list?
Ho Ho Ho! Merry Christmas.. What do I want for Christmas? A Red Ryder BB Gun of course. Did I just date myself there? Yeah.. that movie is old!
The age-old debate: is Die Hard a holiday movie?
Really? This is a real estate mag.. C’mon people! Ok.. I’ll dive in since it’s been asked. I have to err on the side of caution and say yes it is but I’m not a Die Hard aficionado. It takes place during christmas.. There are holiday songs throughout the movie.. And I believe Bruce Willis’ character is wearing a santa hat as he’s running around barefoot saving people. What could be more “holiday” than that? So, there you go.. It’s a holiday movie! It’s not my favorite holiday movie though. I think I’d have to save that spot for something Grinchy.. Not the Jim Carrey Grinch movie. I’m more into the old-school cartoon version. There I go again dating myself!
