All Forum Posts by: Michael Farinello

Spoiler alert:

Despite high mortgage rates and soaring home prices, there's an argument for prospective buyers to enter the US housing market now due to reduced competition. High mortgage rates, currently at 8%, have discouraged many potential buyers, creating a somewhat favorable environment for those who are willing to act. Experts suggest that when mortgage rates eventually drop, there will be a surge in demand, potentially causing home prices to rise significantly, making this an opportune time for buyers who can find something within their budget.

Article below:

Why now is actually a good time to buy a house

As a loan officer, I’ve often seen the potential in both distressed properties that need rehab, as well as turnkey rental properties for passive income potential, but which is the better option for returns? Both options have their unique benefits and drawbacks, but for the sake of this debate I believe that buying distressed properties has more potential for long-term profitability.

The primary benefit of buying distressed properties is the potential for a higher return on investment (ROI). These properties are usually sold at a lower price due to their ‘poor' condition, and with some rehabilitation and renovation they can be transformed into valuable assets. This often results in a higher profit margin compared to turnkey rental properties, which are typically sold at a higher price due to their ‘good' condition. Additionally, with a well-executed renovation project, the value of the distressed property can be significantly increased, providing a solid foundation and equity position.

Another benefit of buying distressed properties is the ability to customize the property to meet the needs of your target market. With turnkey rental properties, you are limited to the existing design and layout, which may not appeal to all potential tenants. With distressed properties, you give yourself the opportunity to make changes to the layout, design, and finishes to better meet the needs and preferences of the local market. This not only increases the property's appeal to tenants, but it can also increase its rental income and overall value.

Furthermore, buying distressed properties allows you to take advantage of government incentives and programs that can help offset the cost of rehabilitation and renovation. These programs often provide financial assistance, tax incentives, and low-interest loans to encourage investment in revitalizing communities and promoting affordable housing.

It is important to note that buying distressed properties requires a significant investment of time and resources. Renovation projects can be complex and time-consuming, and it is essential to have a clear plan in place and the right team to execute it. Inexperienced investors may find the process challenging, and it is important to be well-informed and prepared before making such an investment.

In conclusion, buying distressed properties that need rehab and renovation offers the potential for a higher ROI, the ability to customize the property to meet the needs of the target market, and the opportunity to take advantage of government incentives. While it requires a significant investment of time and resources, the potential for long-term profitability makes it a worthwhile consideration for investors seeking to diversify their portfolios.

Always remember to consult your realtor, a market expert or a loan officer (like me) to understand the risks, benefits and ROI of any opportunity.

Cap rate, short for capitalization rate, is a metric used to evaluate the performance of an investment property; and is a widely accepted metric in the real estate industry used to compare the potential returns of different properties. By determining the cap rate of a property, an investor can compare it to properties in the same area and with similar characteristics to determine its relative performance. It can also be used to compare different properties, even if they are not similar in terms of size, location or type.

Why is this important?

A higher cap rate may indicate a better return on investment, while a lower cap rate may indicate a higher risk investment. It allows for the analysis of risk and return. Properties with higher cap rates may have greater potential returns, but also come with more risk. By understanding the cap rate, an investor can make more informed decisions about the level of risk they are willing to take on.

So how is cap rate determined?

It is calculated by dividing the net operating income (NOI) of a property by its purchase price or current market value, the resulting percentage is the cap rate. Here is an example:

Let's say a rental property generates $60k in annual rental income and has operating expenses of $10k per year. The NOI for this property would be $50k. If the purchase price for this property is $500k, the cap rate would be 10% (NOI of $50k divided by purchase price of $500k).

It's important to note that the cap rate is not the only metric that should be considered when evaluating an investment property. Other factors such as location, condition of the property, and potential for appreciation should also be considered.

It can only help to consult your realtor, a market expert, or a loan officer like myself to understand the values, operating income and expenses of any particular property.