“Should I wait until the market crashes until I buy another investment property?”

Also sometimes stated as “Foreclosures are coming… so I’ll get a deal if I wait.”

My answer is “No – buy now!”

Why? Because demand is still so strong for investment homes and the months-of-remaining inventory still firmly shows we are in a Sellers’ Market.  Our investors like to buy in three counties. All three: Cobb, Cherokee, and Bartow have a lack of inventory. The have 1.7, 2.2, and 2.0 months of remaining inventory (MRI) for homes priced under $400,000.  This means that even with the slowed down sales rate caused by the higher interest rates,  ALL available homes would be sold within 2.2 months or less.

A Sellers Market is generally defined as less than 5 months of inventory.  A Buyers Market is generally defined as more than 7 months of inventory remaining.

At the current pace, even with the market slowing, it will take at least 3 to 4 years to get into a Buyers Market.  We expect prices to continue to rise during this time simply due to supply and demand.

Demand will remain strong.  Let’s look at supply.

Builders still aren’t building enough homes. And they have cut back on production lately. To get a bargain on a new home there would need to be a ton of resale homes coming on the market. We don’t see that happening as people with homes have loans with interest rates too low to move unless they absolutely must. Think about it. Why would they trade a 3% loan for a 6% one, raising a payment on same priced home… by double?

Many pundits are saying here comes the next wave of foreclosures.  If you remember the great recession the decline in prices happened in a large part due to short sales and foreclosures from 2007 to 2012.  I have been asked by many home/investor buyers in the past few months when will this happen.

This simply won’t happen because:

1. Subprime loans do not exist any longer.
2. Lending Standards tightened up and “free/cheap money” didn’t get loaned out.
3. The number of underwater loans is at all-time lows of 2.9%. Normal is about 4-5%.
4. Homeowners have substantial equity.  If they get into financial trouble and have $100,000+ in equity they will simply sell their homes. They have options they didn’t have in 1007-2012.

Supply is going to continue to be limited. Low supply and high demand means rising prices.  Rising prices means the market is not going to crash. So, if you are in the market to add wisely to your portfolio – NOW is the time to act. The key is having the right Realtor with the right experience help you.

Real Estate Stats and Thoughts

Our primary areas of service are below, and they continue to be a strong sellers’ market. Newspaper headlines are stating the market is dropping and while it is true that prices dropped in some areas Month-over-Month (from July 2022 to August 2022 it was about 2%) the real story is that Year-over-Year is still showing extremely healthy appreciation.

This appreciation has slowed a bit to 16.5% over same month last year. Yes, the number of closings declined by 27.5% – attributable to the rise in interest rates. We predict that pace may be the new normal for selling, as the market is changing.

The number of Active Listings is INCREASING in Cherokee AND Cobb Counties – combined we have 3534 homes for sale (Up from 2206 in January of 2022) however, we only have 17 properties for sale under $200,000! All 17 are fixer-uppers, lot value only, not habitable, or being advertised as fix and flips.  Last month 941 homes closed in the two counties; giving us just over 3 months of remaining inventory which has traditionally proven to be a sellers’ market.

Exciting Stuff in and Around Marietta

We enjoy Marietta Square with literally something for everyone. Farmers Markets, 36+ Dining options, Art Stores, a fountain and a series of events that rival any small town in America.   It also hosts the Strand Theatre and the Marietta Museum of History.

 

The Square is a “can’t miss” when hosting out of town guests!  Be sure to stop by the Gone with the Wind Museum if you come into town yourself.

The beautiful and peaceful Sope Creek Trail  is also a surprising oasis in a hustle and bustle small city.

And Six Flags White Water is a sure-fire family activity and is truly Georgia’s most exciting waterpark.

Property Management: Calculating your ROI… and why ROE may be more important!

The term ‘return on investment” (ROI) is critical to all landlords and landlords-to-be.

I will attempt to explain some of what there is to know about the subject, including how to calculate your ROI for a rental property to ensure that the investment you make, or already have made, turns out to be a profitable one.

And then we will look at the Return on Equity (ROE).

What constitutes a return on investment (ROI)?

A return on investment (ROI) is a measurement presented in percentiles that indicates how profitable an investment is. In this case, the investment is the rental property. It’s a factor of great importance to landlords that can help them decide whether acquiring a rental is worth it.

How hard is it to calculate your ROI for a rental property?

The answer to this question largely depends on the purchasing method. For instance, it’s easier to calculate the asset’s ROI if it was bought all in cash. On the other hand, the profitability is somewhat harder to evaluate for the purchases with a mortgage. There are more variables to consider in the case of the latter, thus making the calculation process more complicated.

In both cases, the formula is the same. To find out the property’s ROI, divide the annual return by the amount of the total investment. Of course, you’ll first have to figure out just how much of an annual return you can expect, as well as all the costs of the purchase.

How to calculate ROI for a rental property financed with cash?

The first step towards determining whether your rental asset is profitable is to calculate its annual return. To do so, before all, you’ll have to come up with an amount the property may rent for.

Let’s assume that we are able to travel back in time to 2002 and we are looking to buy a property for $100,000. And we could rent out the property for $1,000 a month. Over the course of the year, we are looking bring in income of $12,000. Of course, each month, we are in charge of covering certain fees, such as property taxes and insurance. In this situation, let’s say you are dedicating $200 a month towards those. That means that our yearly expenses account for $2,400.

Now that we know gains and expenses, it’s time to deduct one from the other and get your annual return. In this example, that’s $12,000 – $2,400, which comes down to $9,600.

Now, let’s talk about the costs of the purchase.

These include the actual price you’ve paid for the property, the closing costs, as well as the remodeling costs. We’ll assume that the property was valued at $100,000, that closing costs were $1,000, and that you’ve also put down $9,000 towards a remodeling project. All of those combined make the total purchasing costs of $110,000.

You’ve got your yearly return and the total investment costs all accounted for and are ready to calculate your ROI. The only thing left to do is to divide the two numbers. Here, that’s $9,600 ÷ $110,000, making the ROI 0.087 or 8.7%.

Calculating the return on investment for a property financed with a mortgage:

Getting to the annual return and the total costs is more complex when you have a mortgage. In the previous example, the property in question was valued at $100,000, and we’ll use the same one this time, too. If you take out a loan, you won’t be paying the entire amount out of pocket, but you’ll still be required to put down 20% of the value in the form of the down payment, which accounts for $20,000.

As for the closing costs, in the case of mortgages, they are typically higher. For the purpose of explanation, let’s say there are $3,000. Now, let’s say you also want to remodel the place and are willing to spend $7,000 on it. In the end, when you combine all those numbers, you are looking at paying the total of $30,000 straightaway, no mortgage included.

You’ve decided to rent the place at $1,000 a month and are looking at the yearly income of $12,000. You are still obligated to pay the taxes and insurance on a month-to-month basis in the amount of $200, or $2,400 a year.

However, on top of that, you also have the mortgage to take care of. If we say that your monthly installment was $500, that’s actually $6,000 you’re spending on a mortgage per annum. Deduct the ongoing costs from the rental income to get the annual return. Here, that’s $12,000 – $2,400 – $6,000, which ends up being $3600.

From here on out, it’s easy to calculate your ROI for a rental property, as the formula is the same. Annual return divided by the total costs, $3,600 ÷ $30,000, which puts the ROI at 0.12 or 12%.

What is considered a good return on investment?

In theory, the higher the return on investment, the better. It’s tough to talk about the ideal percentage, as everybody seems to have a different point of view regarding the subject. However, the rule of thumb suggests that an ROI above 8% is up to most people’s standards in 2022. Although, anything over 4% may also be considered acceptable if there is future appreciation potential.

What is Return on Equity (ROE) and why is it important?

Taking the above example and fast forward from 2002 when you bought it, back to present day in 2022.  That $100,000 property is now worth $400,000 and you now owe about $30,000, with 10 years left, of that $500 a month mortgage.  Rents have increased to $2000 a month and expenses have also risen to $500 a month.

We will also need to factor in repair costs of a 20+ year old home vs a new one. Your ROE would be net yearly proceeds divided by your Equity of $370,000 ($400,000 less the remaining loan of $30,000).  In this case, income is $24,000 ($2000 x 12 months) and expenses are $12,000 ($500 in expenses and $500 in loan payment -= $1000/mo. x 12 months). Let’s say you have $3000 in additional annual average maintenance.

That leaves the net income at $9,000 which when divided by the $370,000 in equity gives you a return of 2.4%!

Many owners are opting to sell an older property via a 1031 Exchange (so they defer capital gains taxes) and use that great equity to buy two or more brand new construction homes instead. This massively improves their ROE – return on equity – and spreads their risk from 1 home to several.  This is how smart investors build wealth through re-leveraging their equity.

Contact us to see if this could be a more profitable business decision for you in your current situation. Call Mike at 678-232-0927 or catch Donna or Jon at the office at 7709-726-1454. Or email is at info@nwatlp.com