Tag: interest rates

Many people make big mistakes when they try to determine the cash flow potential of a rental property. Basically, they think that if the market rent for the house is higher than the mortgage, they’re in the money.

 

It’s not that easy. If it were, anybody could do it. Lots of houses can be purchased with a mortgage payment lower than the market rent.

 

But as any homeowner can tell you, the expenses don’t stop at the mortgage. If you want positive cash flow for your rental property, your rental collection needs to cover all expenses.

 

Here’s a cheat sheet of expenses to make sure to account for when doing your cash flow analysis for a prospective rental property:

Mortgage Payment

First and foremost, you need to know your monthly mortgage payment. This is usually where people start, but the expense rabbit hole goes much deeper. 

Property Taxes

Property taxes to the county are mandatory; otherwise, the county can foreclose on your property, just like your lender. Property taxes are usually due once or twice a year, but your lender may require you to pay monthly into an “escrow” account to make sure there are funds available to pay those property taxes.

Insurance

Property insurance is usually required by a lender so a fire doesn’t destroy the collateral — at least not without an insurance policy to claim against it. 

 

If the property is in a FEMA-designated flood-risk zone, the lender may require flood insurance, as certain flood damage is not covered by homeowner’s insurance. 

 

Landlords may also want to consider liability insurance, which will protect them in the event of a lawsuit filed by a tenant. The lender may require payments into the escrow fund to cover insurance as well.

Fees and Assessments

Property taxes may not be the only assessment against your property. Condo association or homeowner’s association fees are common offenders. Yes, your HOA can foreclose on you if you don’t pay your HOA fees! The lender may require you to fund HOA fees in your escrow account too — they really don’t want someone else foreclosing your property before they can.

Utilities

As the landlord, you are sometimes responsible for some utilities, like water, electricity, or gas. You may be able to bill these back to the tenant for extra income.

Repairs and Maintenance

Maintenance of the property falls to the owner, not the tenant. Maintenance emergencies can arise out of nowhere and be very costly in terms of contractor costs, handyman costs, and replacement of major appliances like a refrigerator or HVAC. Smart landlords don’t pocket every dollar of excess rent — they usually pay some or even most of it into a “maintenance fund” to cover any big expenses that may arise. 

Contract Services

Contract services are recurring maintenance services that might include gardening and landscaping, trash collection, pest control, and routine maintenance (changing air filters, flushing water heaters, etc.)

Professional Services

Professional services might include tax preparation and legal fees. Legal fees could include contract review, litigation costs, and eviction fees.  

Property Management

If you decide to hire a property manager to free yourself from operational responsibility for the property, you will usually need to pay that manager a percentage of the gross rents collected. Current rates are typically 8% -10% of the gross rents.

 

Vacancy Expense

Few rental properties can maintain 100% occupancy at all times. With proper management you can get close, but it’s usually wise to factor in at least some vacancy expense — time when your property is vacant and not collecting any rent. Cities usually have a prevailing market vacancy rate which you can use to be conservative, but somewhere between 5% and 10% of the gross rent potential is standard.

 

——————————————————————————————————

 

If you calculate all relevant expenses and come out with a number that is less than the gross rent potential, congratulations! You have identified a property with strong potential for positive cash flow, all the while appreciating in value.

 

Having trouble estimating expenses? Martel Turnkey can help! We have extensive experience making accurate calculations of real estate expenses. Every property in our inventory includes detailed expense projections, which we can back up with evidence. Want to do cash flow analysis the easy way? Reach out to us — we’re glad to help!

We’ve enjoyed bottom-of-the-barrel interest rates for years, but that may be about to change. The Federal Reserve raised its key interest rate by a quarter-point last month, and we expect that to be the first of at least three interest rate hikes to happen this year.

 

So is the party coming to an end? What will happen to the real estate market — for homeowners and investors — in an environment of rising interest rates?

What Happens When the Fed Raises Interest Rates?

First things first, the Fed doesn’t dictate what interest rate your bank can charge you for a mortgage. That’s not the interest rate they control. 

 

What they do control is the Federal Funds Rate, the rate at which FDIC-insured banks are allowed to lend money to each other. 

 

Does this affect the interest rates you pay on your mortgage, car loan, or credit card? It can, but it’s not guaranteed. 

Why Does the Fed Raise Interest Rates?

The Fed may not directly control the interest rates banks pay, but by making it more expensive for them to lend, they are hoping that these interest rates trickle down to consumers in the form of higher interest rates on consumer loans, credit cards, and other loans. 

 

Why? Why raise interest rates at all? Don’t we have enough to worry about in terms of rising costs? Are the Fed just committed to being killjoys and party poopers?

 

Raising the Federal Funds Rate is one of several tools the Fed uses to try and control the supply of money in the economy. If it’s more expensive to lend to each other, banks will likely flood the economy with less financing. If money becomes scarce, it will become more valuable — which means it acts as a counterweight to inflation.

 

Considering inflation has tipped the scales at nearly 8% over the past year, you can see why the Fed would want to take this kind of action. Paying a little more interest may not be fun, but compare that to the recent increases to the price of gas and food, costing the average household over $5,200 extra out of pocket compared to last year.

What Will Happen to the Real Estate Market Now?

So if our historically low interest rate market is coming to an end, what’s next for real estate markets?

 

Actually, the real estate market has done relatively well in environments of rising interest rates, like those we experienced from 2004-2006, as well as 2018. Both of those eras experienced hot real estate markets.

 

The interest rate you pay for a mortgage has less to do with the Federal Funds Rate, and more to do with the demand for mortgage bonds — big bundles of mortgages that banks package together and then sell as an investment. If the demand for these bonds is high, it puts downward pressure on mortgage interest rates.

 

Right now, mortgage bonds are being bought up en masse by the Fed, of all things. Since the pandemic, the Fed has bought over $40 billion worth of mortgage bonds per month in an effort to keep the housing market hot.

 

Ultimately, the real estate market responds to the laws of supply and demand. Inflation and foreign conflicts have made the demand for US real estate high, while the demand for mortgage bonds is likely to slow any coming increases in mortgage rates.

 

————————————————————————————————————

 

If you want to take advantage of historically low interest rates while they last, Martel Turnkey can help you act fast by putting the right investment property in front of you — rehabbed, rented, and ready to buy.  Lock in for now for 30 years and you will be glad you made this decision.