Mike’s Mid Day Mortgage Update – Helping Buyers Understand Real Estate ROI I was speaking with a real estate agent friend of mine recently. We discussed a client who is considering taking money out of the stock market and investing in real estate. The question was simple: What is actually worth buying right now? I never push anyone into something they are not comfortable doing. But I am always willing to go over the numbers, be realistic about today's market, and help buyers understand where real estate can go over time. Let's use a real example. Example Investment Property Purchase price: $850,000 Down payment: 25% / $212,500 Loan amount: $637,500 Interest rate: 6.5% Principal & interest payment: About $4,029/month Total payment with taxes and insurance: About $5,200/month Maintenance, management, and repairs: About $500/month Total monthly cost: About $5,700/month Estimated rent: About $4,300/month Starting monthly shortfall: About $1,400/month Estimated total cash invested: About $240,000 At first glance, this may not look very exciting. The buyer is putting down a large amount of money and may still be negative every month. But that is only the first part of the story. The Part Buyers Often Miss Even if the property is negative from a cash-flow standpoint, the loan is still being paid down. At a 6.5% interest rate, the principal paydown grows over time: Year Principal Paydown Monthly Equivalent Year 1 About $7,125/year About $594/month Year 5 About $9,235/year About $770/month Year 10 About $12,770/year About $1,064/month Year 15 About $17,659/year About $1,472/month So while the property may start out negative, equity is still being created every month. Where Could They Stand? Assuming either 4% or 5% annual appreciation, here is what the property could look like over time. For ROI, I am using the estimated equity compared to the initial $240,000 investment. Year Value at 4% Equity at 4% ROI at 4% Value at 5% Equity at 5% ROI at 5% 5 $1,034,155 $437,385 82% $1,084,839 $488,069 103% 10 $1,258,208 $717,760 199% $1,384,560 $844,113 252% 15 $1,530,802 $1,068,237 345% $1,767,089 $1,304,524 444% That is the real estate story. The beginning may feel uncomfortable, but the equity picture can change dramatically over time. A buyer may start with about $240,000 invested, but after 10 to 15 years, they could potentially be looking at several hundred thousand dollars, or even more than $1 million in equity. Real estate is the combination of Appreciation, principal paydown, rent growth, tax advantages, depreciation, refinance opportunities, future cash flow, and eventually a paid-off asset. That is why I would rather show buyers where they may stand after 5, 10, and 15 years… That tells a much better story than only looking at whether the property is cash-flow positive in month one. The Bottom Line for Agents Real estate agents do not need to push buyers into investments. But they should be able to help buyers understand the full picture. A property may start out negative. That does not automatically make it a bad investment. Cash flow is only one part of the equation. Investors also need to understand principal paydown, appreciation, depreciation, possible tax benefits, rent growth, future refinance opportunities, and long-term equity creation. Agents do not need to be tax advisors, CPAs, or lenders. But if they are going to talk to clients about investment property, they should understand the bigger picture, or have a lender and tax professional in their corner who do. If an agent cannot explain these pieces confidently, that is okay. But they should have a lender who can help walk the client through the financing side and a CPA or tax advisor who can explain the tax side. The goal is not to push the buyer. The goal is to help the buyer make an educated decision with the right information in front of them. The real questions are: Can the buyer handle the monthly shortfall? Do they have enough reserves? Is the property in a strong long-term location? Can rents reasonably increase over time? Is there future refinance potential? What does the equity picture look like in 5, 10, and 15 years? Have they reviewed potential depreciation and tax benefits with their CPA? Real estate is not always about what feels good today. It is about what the asset can become over time. For the right buyer, with the right reserves and the right expectations, real estate can still be one of the best long-term wealth-building tools available. Interest Rates – Interest rates have improved, and a major reason is the market's focus on oil prices, inflation, global conflict, and the possibility of easing geopolitical tensions. Whether the latest headlines about Iran are real progress or just noise, the bigger picture remains the same – Inflation, oil prices, and geopolitical risk continue to play a major role in where interest rates go next. Loan Programs Snapshot Here is a general snapshot of where programs are pricing today: Government loans - FHA, VA, USDA: In the 5s Conventional loans up to $832,750: High 5s to low 6s High-balance loans: Mid 6s Jumbo loans: Low to mid 6s Bridge loans: Around 7.75% to 7.99% Additional options available: Bank statement loans - 10% down and up P&L loans - 20% down, no bank statements 0% down options - 620+ credit score DSCR loans - 15% down Bridge loans Buydowns - 3/2/1, 2/1, and 1/0 Private money / hard money loans Construction loans FHA 203(k) loans Fix-and-flip loans Rates and programs are subject to change without notice. Condo Update Good news: No major changes today. Bad news: Nothing new to report. We still love your non-warrantable condo loans. Need help checking a condo? Call me, and we can look it up in real time. You can also view the full California non-warrantable condo list here: https://mikemeena.com/non-warrantable-condos/ Let's Connect If you, your clients, friends, or family need guidance, I am always happy to help. Sincerely, Mike Meena President | Loan Officer Click to Call or Text: (661) 714-6258 This entry has 0 replies Comments are closed.
