Tag: interest rates

Real Estate Investment 101: Differentiating CapEx from Maintenance

Posted on by Will Sing

Are you diving into the world of real estate investment? If so, understanding the crucial difference between capital expenditures (CapEx) and maintenance is key to your success. In this comprehensive guide, we’ll break down these terms, show you how to calculate them, and teach you how to forecast them when analyzing potential deals. Let’s get started!

What Are Capital Expenditures and Maintenance?

Capital Expenditures (CapEx)

CapEx refers to significant, long-term investments made to improve or increase the value of a rental property. These are typically big-ticket items such as:

  • Roof replacement
  • HVAC system upgrades
  • Major plumbing or electrical renovations

Maintenance

Maintenance involves routine tasks that keep the property in optimal condition. These are usually more frequent and less costly expenses, including:

  • Regular lawn care and landscaping
  • Exterior cleaning and power washing
  • Appliance repairs (e.g., fixing a leaky dishwasher)

How to Factor CapEx and Maintenance into Your Deal Analysis

When evaluating potential real estate investments, it’s crucial to distinguish between CapEx and maintenance. Here’s a step-by-step approach:

Analyzing Capital Expenditures

  1. Assess Major Systems: Thoroughly inspect the roof, water heater, HVAC system, plumbing, and electrical components. Evaluate their current condition and estimated remaining lifespan.
  2. Calculate Costs: As a rule of thumb, CapEx should account for 2-7% of the property’s value. For properties requiring significant updates, lean towards the higher end of this range.
  3. Forecast Future Needs: For properties in excellent condition or those recently renovated, you can reasonably budget a lower CapEx percentage.

Estimating Maintenance Costs

  1. Evaluate Property Condition: Look for signs of wear and tear, older appliances, and the overall state of the property.
  2. Estimate Monthly Expenses: Maintenance costs typically range from 2-5% of the gross rent. Larger properties with extensive landscaping or amenities might incur higher maintenance costs.

Building Your Reserve Funds: How Much Should You Set Aside?

The amount you allocate to reserve funds depends on your risk tolerance:

  • Conservative Investors: Aim for 6-12 months of reserve funds to cover potential expenses.
  • More Aggressive Investors: A 3-month reserve fund may suffice if you have additional income streams or savings to cover unexpected costs.

Mastering CapEx Calculations

For a detailed understanding of CapEx, create a spreadsheet using this formula:

Monthly Cost = Replacement Cost / Lifespan (in years) x 12
This formula helps you determine the monthly amount to set aside for each major expense. For more accurate estimates, consult with a general contractor or your real estate agent.

Pro Tips for Savvy Real Estate Investors

  1. Patience Pays Off: It typically takes 3-5 years for a rental property to stabilize, allowing you to understand its true maintenance costs.
  2. Avoid Analysis Paralysis: While it’s important to dive into details, remember to step back and view the big picture. Ensure your investments align with your long-term financial goals.
  3. Organize Your Finances: Initially, you can combine CapEx and maintenance funds into one account. As your portfolio grows, consider consulting a CPA for a more sophisticated accounting system.

Wrapping Up: The Key to Successful Real Estate Investing

Understanding the nuances between CapEx and maintenance is crucial for effective property management and investment planning. By accurately forecasting these expenses, you’ll make more informed decisions and build a robust real estate portfolio that stands the test of time.

If you have any questions about buying a home or need more personalized advice, feel free to reach out to me. Connect with me on YouTube, Instagram, or Facebook.

For a more detailed consultation or to get started on your home buying journey, schedule a free strategy session here. You can also access my Free Buyer’s Guide to help you through every step of the process here.

New Year, New Home: Homebuying in 2024

Posted on by Living Room Realty

Time to gear up for the holidays (or not, for those who don’t partake) and think of those new year “resolutions”. With the new year looming upon us, what better way to start it than with a new home of your own? Whether you’re a first time buyer or upgrading to the next bigger & better thing, now’s a great time to kickstart a plan for your housing goals!

You’ve likely heard the rumors; mortgage rates are coming down in 2024. Some projections include numbers coming down as low as the high 4-percent range (whoa!). While it’s important to note that these are all predictions, we are likely going to see some sort of positive change with mortgage rates sometime in the new year.

While any sort of drop in rates is most certainly helpful for homebuyers, keep this in mind: lower rates, higher competition. Read that one more time to really let that (likely possibility) sink in. It may not come as a surprise that the housing market starts to heat up once rates come down; it totally makes sense! How can you avoid a potential homebuying frenzy and multiple offer situation, you ask? Get started on your homebuying journey while it’s still seasonably slow! This will also create an opportunity to refinance as soon as you’re able — especially if those rates do fall to some reasonable numbers in the near future.

Want more info? Reach out to me directly, I’d love to assist with your home buying and selling needs!

Portland Market Update For Early-August 2023

Posted on by Living Room Realty

Find out what’s happening in the Portland real estate market for Early-August 2023.

 

 

What’s up all, I’m Tony Le with the Houselab team at Living Room Realty, here to tell you what you need to know about the market for early August 2023.

Let’s face it, the current housing market presents some challenges. Inventory in Portland is limited, interest rates are still relatively high compared to this time last year, and sellers who were able to lock in those low interest rates aren’t looking to sell any time soon. As a buyer, things can look daunting, but don’t give up just yet.

 

Market Action Index

The good news for buyers is that the Market Action Index is currently sitting at 49, down from 53 last month and inching towards a buyers market. Inventory, while still limited, is also up, currently sitting at an average of 1,235 homes with a Median List Price of $689,950.


Rate Buydowns

One of the strategies that sellers are offering are rate buy down credits to potential buyers. There are two common types.  Option #1 A permanent rate buy down and Option #2 a 2-1 rate buy down. 

The key difference between a permanent rate buy down and the increasingly common 2-1 rate buy down, is that the 2-1 is temporary, lasting two years. Typically the first year will be 2 percentage points lower than the current rate and the second year will be 1 percentage point lower before returning to the “normal” interest rate at the time of closing. If you have any questions about buy downs, reach out to your agent or lender for more information. 


When Should I Buy?

The question is, when will rates go down? And even more importantly, when they do drop, and the market floods with new buyers, what will the competition do to sales prices? Will we see buyers give away the farm, just to get the house? This is why leveraging one of the rate buy-downs in today’s less aggressive market could be the key to getting your dream home.

 

Make A Move

Living Room Realty is committed to connecting you with as much information to help you make an informed decision. If you’re ready to make a move, give us a call today. We’d love to help you find your next Living Room.

 

Cost comparison: the long-term financial implications of higher interest rates

Posted on by Jessica LeDoux
Is investing in a home now financially favorable? Recently one of our favorite lenders, Steph Noble, sent around this helpful comparison:

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As always, buying longevity in your home is going to give you the most bang for your buck. When looking at the long-term trajectory of the market combined with today’s lower home prices and increased buyer opportunities, there is still a strong case to be made for purchasing now.

With interest rates rising, is now still a good time to buy?

Posted on by Jessica LeDoux
This is the big question on many buyer minds right now. While interest rates have risen considerably, this does not equate directly to it being a bad time to buy. It all depends on your circumstances and perspective. 
 
If you are deciding to buy vs. rent, buying a home may still be a great option. Purchasing a home can have the advantage of providing security/stability and if financing your home, it will allow you to spend your monthly payment toward an investment you can see a return on in the future. You will also be creating an opportunity for building equity as home values increase over time. Markets will eternally fluctuate. If you buy smart (prioritizing your needs around the unchangeables of a home – location, layout, etc.) and intend to hold your investment for some time (5+ years), riding the waves of the market is much more feasible and most importantly, you can enjoy the home you love in the meantime. 
 
Rates are high, that’s undeniable, but it’s also important to keep in mind that current rates are in keeping with historical averages. (Interest rates since 1971 average in the mid 7’s.) 
 
The climbing interest rates have put downward pressure on pricing, which we see evidence of in increased opportunities at all price points. This can look like: more room to negotiate, an opportunity to come in closer to or below list, less aggressive terms, and with a decreased number of buyers in the market, less competition. However, there are still a good deal of motivated buyers in the market and we are still seeing competition for highly desirable homes.
 
Most homeowners refinance their home in the first 3-7 years. The rates today are not something you have to view as a marriage, but the home you buy is. Higher interest rates are just one factor in the process of deciding whether now is the right time to buy for you. 
 
As Real Estate professionals, we aim to help each client elevate all questions by providing more perspective and information on the options available to them. The result is a more informed decision no matter the outcome and this team excels at supporting people in that process.  We are here to help.

The Market in Focus: Lower Interest Rates Coming for Low-Risk Borrowers?

Posted on by Aryne + Dulcinea

By Aaron Nawrocki, Capital M Lending

For many years, all eligible borrowers received the same interest rate. In essence, there was one base interest rate, and if your mortgage was approved, that’s the rate you got. While it may not have been perfectly equitable, it certainly made it easy for lenders to quote interest rates and for buyers to understand. However, the development of big-data and risk assessment platforms, lower interest rates may be attainable for low-risk borrowers.

In 2008, Fannie Mae (FNMA) and Freddie Mac (FHLMC) added interest rate adjustments for different loan characteristics. After the government-sponsored enterprises (GSE) went into receivership, they examined their portfolio and its performance, adding extra charges to their base rate for factors such as:

– Lower credit scores
– Using a concurrent second mortgage (combo loans)
– Type of refinance transaction (cash out refinances)
– Down payment percentages

The idea was that the above factors affected risk – e.g. lower credit score loans would default more frequently. Consequently, borrowers with fewer risk factors are more likely to get lower interest rates than their counterparts. Raising the cost for higher risk loans would better connect a mortgage’s risk to its cost. It’s analogous to car insurance – if a driver has a few tickets, the cost of insurance is naturally higher as the insurance company is more likely to suffer a loss.

The adjustments to rate put in place in 2008 (and adjusted thereafter) are constant across all lenders for conforming loans, as they’re established by FNMA/FHLMC. Here’s where it gets interesting. Fannie and Freddie back tested their tweaks in 2014 to see if the interest rate adjustments accurately reflected the loss ratios based on loan characteristics. What they found is that they overestimated the loss ratio for high credit score borrowers and underestimated the loss ratio for low credit score borrowers. In other words, “risky” borrowers were getting a better deal than “premium” borrowers. To think of it in health insurance terms, the healthy were paying for the sick.

Markets have a way of evolving in response to information and big data is a buzzword we see all over these days. As mortgage banks (and FNMA/FHLMC) build deeper databases and connect loan characteristics to loss rates, expect to see more complex pricing. There will likely be a greater range of interest rates offered, with larger discounts for higher credit scores and larger down payments. Banks and buyers will adapt to these changes and they’ll become part of the marketplace. For buyers, it means that keeping credit scores as high as possible will be more important in securing lower interest rates. Credit scores will be examined in an upcoming column and I’m always available to answer and financing questions you may have. To learn more about current real estate trends, or to speak with a real estate specialist about buying or selling a property, contact Aryne + Dulcinea. Their expertise in today’s market will ensure you have an optimal experience during your next real estate venture.

 

Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.

 

About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.

The Market in Focus: Interest Rates & the Portland Housing Market

Posted on by Aryne + Dulcinea

By Aaron Nawrocki, Capital M Lending

It’s been an exciting 2018 so far in the stock and bond markets. The broad indices are down over 10% from their peaks. Treasury Bond and mortgage rates are at a four-year high. It may be a good time not to look at your 401k statements, but what about the effect on home prices and the Portland housing market?

Higher interest rates make homes more costly, even if prices don’t rise. The higher cost of borrowing generally slows price increases. If we looked back over the last 20 years, we’d see a general correlation between rates rising and prices stalling. Mortgage interest rates are up about .5% over the last month, and for the average Portland homebuyer that means an increase in monthly payment of about $150. That’s enough to slow appreciation down somewhat and that’s exactly what the Fed hopes to accomplish with their rate increases.

Is it the second coming of 2009? Not likely. Interestingly enough, a moderate increase in borrowing cost can slow price increases, but rarely does it dramatically slow the market. Buying a home is a serious decision and typically the largest single financial transaction a family will make. Most buyers make the decision to buy a home based on their financial prospects and choose the price based on the monthly payment. So, interest rates don’t necessarily keep folks from buying, but they do affect the price they are willing to pay. We have a growing economy with a shrinking middle class (that’s a discussion for another day) and many Americans feel confident about their jobs and prospects. That confidence is what make buyers feel comfortable about buying homes (and is much more important than interest rates in the buying decision.) We learned this during the recession. Lower interest rates and lower mortgage payments don’t bring buyers in from the sidelines if they are worried about their jobs.

As the Fed works to smooth out and proactively dampen the economic cycle, watch for a brief slowdown while buyers and sellers receive and react to rates. Once the new normal for interest rates is accepted by the Portland housing market, it’s likely we’ll see buyers continue to enter the market. Portland is a desirable destination and still affordable for many potential homebuyers. We’ll see if the rate changes are a correction or a sign of things to come. For now we expect robust sales and a healthy market balanced between buyers and sellers.

 

Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.

 

About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.