This article with the brash title is from Business Week, by Marc Roth. It really hits the nail on the head and should be a wake-up call for EVERY potential real estate investor out there. It is a simple message telling you to “do the math.”
When it comes down to it, what matters is cash flow. All else being equal, the amount of cash flow is going to come down to debt service… which boils down to price and interest rate.
Read the article for a good history lesson on interest rates and the economy.
Today, a $200,000 fixed rate, 30-year loan at 4.75% interest will run $1,043 each month. Using a 3x multiplier you need approximately $3,129 per month in gross income.
If you were to try to get this same $200,000 loan, but waited until interest rates climbed to 6.75%, you would be paying $1,297 for exactly the same amount of borrowed money.
The difference between what you pay on the two rates is $254 each month. That is a substantial difference taking you from in the black – cash flow positive - to in the red.- negative cashflow.
Alternatively you could look at it from the standpoint of making the same payment, in which case you would only be able to borrow $160,700. At 10-percent down, that results in a $43,666 reduction in purchase price. This would mean a lesser home for lesser rents. Or, it would mean praying that home values fall another 20% while rates remain constant.
Over the life of the loan, you have approximately $250 time 360 months for $90,000. That is enough for down payment on another two or three rental properties.
Admittedly we're biased, but there really couldn't be a better time to find cashflow positive property using a buy-and-hold strategy.
To find cashflow properties, use the cashflow search engine, FinestExpert.com, to automatically find cashflow positive properties in any state, nationwide. Sellect the "financial" search criteria dropdown and enter, say $100 for cashflow and press search. You can, of course, also select property characteristics or geographic areas simultaneously.
