Post by Brian Gibbons on Mar 19, 2005 3:33:38 GMT -5
REAL ESTATE FINANCE IN SIX EASY LESSONS
LESSON II: HOW FINANCING AFFECTS THE REAL ESTATE MARKET
From the desk of Best-Selling Author & Attorney
William Bronchick
www.legalwiz.com
Dear Friend,
You're getting this message because you requested my *FREE* email education series, "Real Estate Finance in Six Easy Lessons." This email is part two. You will receive the other four lessons shortly, giving you time to digest this great information.
Before we get started, I would like to make you a special, limited-time offer on my powerful home-study course,
--- FLIPPING PROPERTIES ----
If you order within the next 48 hours, you can save 20% by using the order code "valuedcustomer" when you checkout through our online store.
Follow this link for more info:
www.legalwiz.com/flippingcourse.htm
Now, on to lesson two:
HOW FINANCING AFFECTS THE REAL ESTATE MARKET
Since financing plays a large part of real estate sales, it also affects values; the higher the interest rate, the larger your monthly payment. Conversely, the lower the interest rate, the lower the monthly payment. Thus, the lower the interest rate, the larger the mortgage loan you can afford to pay. Consequently, the larger the mortgage you can afford, the more the seller can ask for in the sales prices.
Also, people with less cash are usually more concerned with their payment than the total amount of the purchase price or loan amount. On the other hand, people with all cash are more concerned with price.
Since most buyers borrow most of the purchase price, the prices of houses are affected by financing. Thus, when interest rates are low, housing prices tend to increase, because people can afford a higher monthly payment. Conversely, when interest rates are higher, people cannot afford as much a payment, which generally drives real estate prices down.
Since the mid 1990's, the prices of real estate have dramatically increased in most parts of the country. The American economy has grown, the job growth during this period has been good, but most importantly, interest rates have been low.
HOW FINANCING AFFECTS PARTICULAR TRANSACTIONS
When valuing residential properties, real estate appraisers generally follow a series of standards set forth by professional associations (the most well-known is the Appraisal Institute).
Sales of comparable properties are the general benchmark for value. Appraisers look not just at housing sale prices of comparable houses, but also at the financing associated with the sales of these houses. If the house was owner-financed, the interest rate is generally higher than conventional rates and/or the price is inflated. The inflated price is generally because the seller's credit qualifications are looser than that of a bank, which means the buyer will not generally complain about the price.
******** SIDE NOTE: ***********
Take a Cue from Other Industries. The explosion of the electronics market, the automobile market, and other large-ticket purchases is directly affected by financing. Just thumb through the Sunday newspapers and you will see headlines such as "no money down" or "no payments for one year." These retailers have learned that financing moves a product because it makes it easier for people to justify the purchase. Likewise, the price of a house may be stretched a bit more when it translates to just a few dollars more per month in mortgage payments.
******************************
Appraisals on income properties are done in a variety of ways, which include the "income" approach. The income approach looks at the value of the property versus the rents the property can produce. While financing does not technically come into the equation, it does affect the property's profitability to the investor.
Thus, a property that can be financed at a lower interest rate will be more attractive to the investor if cash flow is a major concern.
************** SIDE NOTE ****************
THE TAX IMPACT OF FINANCING
Down payments made on a property as an investor are not tax-deductible. In fact, a large down payment offers no tax advantage at all, since the investor's tax basis is based on the purchase price, not the amount he puts down. However, since mortgage interest is a deductible expense, the investor does better tax wise by saving his cash. Think about it... the higher the monthly mortgage payment, the less cash flow, the less taxable income each year. While positive cash flow is desirable, it does not necessarily mean that a property is more profitable because it has more cash flow. A larger down payment will obviously increase monthly cash flow, but it is not always the best use of your money.
*****************************************
WHEN IS CASH BETTER THAN FINANCING?
Using all cash to purchase a property may be better than financing in two particular situations. The first situation is a short-term deal, that is, you intend to sell the house shortly after you buy it (known as "flipping").
When you have the cash to close quickly, you can generally get a tremendous discount on the price a house. In this case, financing may delay the transaction long enough to lose an opportunity.
Cash also allows you to purchase properties at a larger discount. You've heard the expression, "money talks, BS walks." This is particularly true when making an offer to purchase a property through a real estate agent. The real estate agent is more likely to recommend to his client a purchase offer that is not contingent upon the buyer obtaining bank financing.
********************************************
SIDE NOTE: Understanding a cash offer vs. paying all cash. If you make a "cash offer" on a property, it does not necessarily mean you are using all of your own cash. It means the seller is receiving all cash, as opposed to the seller financing some part of the purchase price.
*********************************************
The second case is one in which you can use your retirement account. You can use the cash in your IRA or SEP to purchase real estate, and the income is tax-deferred. In order to do this, you need an aggressive self-directed IRA custodian (oddly enough, most IRA custodians view real estate as "risky" and the stock market as "safe").
Two such custodians are Mid Ohio Securities (http://www.midoh.com) or Entrust Administration (http://www.entrustadmin.com).
COMING IN THE NEXT EMAIL: WHAT IS A MORTGAGE?
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Be sure and take advantage of the limited-time offer on my powerful home-study course,
--- FLIPPING PROPERTIES ----
If you order within the next 48 hours, you can save 20% by using the order code "valuedcustomer" when you checkout through our online store.
--> www.legalwiz.com/flippingcourse.htm
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Your partner in success,
William Bronchick, the "Legalwiz"
www.legalwiz.com
continued...
LESSON II: HOW FINANCING AFFECTS THE REAL ESTATE MARKET
From the desk of Best-Selling Author & Attorney
William Bronchick
www.legalwiz.com
Dear Friend,
You're getting this message because you requested my *FREE* email education series, "Real Estate Finance in Six Easy Lessons." This email is part two. You will receive the other four lessons shortly, giving you time to digest this great information.
Before we get started, I would like to make you a special, limited-time offer on my powerful home-study course,
--- FLIPPING PROPERTIES ----
If you order within the next 48 hours, you can save 20% by using the order code "valuedcustomer" when you checkout through our online store.
Follow this link for more info:
www.legalwiz.com/flippingcourse.htm
Now, on to lesson two:
HOW FINANCING AFFECTS THE REAL ESTATE MARKET
Since financing plays a large part of real estate sales, it also affects values; the higher the interest rate, the larger your monthly payment. Conversely, the lower the interest rate, the lower the monthly payment. Thus, the lower the interest rate, the larger the mortgage loan you can afford to pay. Consequently, the larger the mortgage you can afford, the more the seller can ask for in the sales prices.
Also, people with less cash are usually more concerned with their payment than the total amount of the purchase price or loan amount. On the other hand, people with all cash are more concerned with price.
Since most buyers borrow most of the purchase price, the prices of houses are affected by financing. Thus, when interest rates are low, housing prices tend to increase, because people can afford a higher monthly payment. Conversely, when interest rates are higher, people cannot afford as much a payment, which generally drives real estate prices down.
Since the mid 1990's, the prices of real estate have dramatically increased in most parts of the country. The American economy has grown, the job growth during this period has been good, but most importantly, interest rates have been low.
HOW FINANCING AFFECTS PARTICULAR TRANSACTIONS
When valuing residential properties, real estate appraisers generally follow a series of standards set forth by professional associations (the most well-known is the Appraisal Institute).
Sales of comparable properties are the general benchmark for value. Appraisers look not just at housing sale prices of comparable houses, but also at the financing associated with the sales of these houses. If the house was owner-financed, the interest rate is generally higher than conventional rates and/or the price is inflated. The inflated price is generally because the seller's credit qualifications are looser than that of a bank, which means the buyer will not generally complain about the price.
******** SIDE NOTE: ***********
Take a Cue from Other Industries. The explosion of the electronics market, the automobile market, and other large-ticket purchases is directly affected by financing. Just thumb through the Sunday newspapers and you will see headlines such as "no money down" or "no payments for one year." These retailers have learned that financing moves a product because it makes it easier for people to justify the purchase. Likewise, the price of a house may be stretched a bit more when it translates to just a few dollars more per month in mortgage payments.
******************************
Appraisals on income properties are done in a variety of ways, which include the "income" approach. The income approach looks at the value of the property versus the rents the property can produce. While financing does not technically come into the equation, it does affect the property's profitability to the investor.
Thus, a property that can be financed at a lower interest rate will be more attractive to the investor if cash flow is a major concern.
************** SIDE NOTE ****************
THE TAX IMPACT OF FINANCING
Down payments made on a property as an investor are not tax-deductible. In fact, a large down payment offers no tax advantage at all, since the investor's tax basis is based on the purchase price, not the amount he puts down. However, since mortgage interest is a deductible expense, the investor does better tax wise by saving his cash. Think about it... the higher the monthly mortgage payment, the less cash flow, the less taxable income each year. While positive cash flow is desirable, it does not necessarily mean that a property is more profitable because it has more cash flow. A larger down payment will obviously increase monthly cash flow, but it is not always the best use of your money.
*****************************************
WHEN IS CASH BETTER THAN FINANCING?
Using all cash to purchase a property may be better than financing in two particular situations. The first situation is a short-term deal, that is, you intend to sell the house shortly after you buy it (known as "flipping").
When you have the cash to close quickly, you can generally get a tremendous discount on the price a house. In this case, financing may delay the transaction long enough to lose an opportunity.
Cash also allows you to purchase properties at a larger discount. You've heard the expression, "money talks, BS walks." This is particularly true when making an offer to purchase a property through a real estate agent. The real estate agent is more likely to recommend to his client a purchase offer that is not contingent upon the buyer obtaining bank financing.
********************************************
SIDE NOTE: Understanding a cash offer vs. paying all cash. If you make a "cash offer" on a property, it does not necessarily mean you are using all of your own cash. It means the seller is receiving all cash, as opposed to the seller financing some part of the purchase price.
*********************************************
The second case is one in which you can use your retirement account. You can use the cash in your IRA or SEP to purchase real estate, and the income is tax-deferred. In order to do this, you need an aggressive self-directed IRA custodian (oddly enough, most IRA custodians view real estate as "risky" and the stock market as "safe").
Two such custodians are Mid Ohio Securities (http://www.midoh.com) or Entrust Administration (http://www.entrustadmin.com).
COMING IN THE NEXT EMAIL: WHAT IS A MORTGAGE?
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Be sure and take advantage of the limited-time offer on my powerful home-study course,
--- FLIPPING PROPERTIES ----
If you order within the next 48 hours, you can save 20% by using the order code "valuedcustomer" when you checkout through our online store.
--> www.legalwiz.com/flippingcourse.htm
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Your partner in success,
William Bronchick, the "Legalwiz"
www.legalwiz.com
continued...