Before you step into the real estate domain and want to find out if you’re getting the best bang for your buck, you need to understand where the market is headed in 2019.
According to the US Housing market forecast 2019/2020 as well as an opinion from the National Association of Realtors (NAR), Zillow and some other top- notch sources, strong demand from the Millennial middle class and a healthy economic performance could overpower any possibilities of a housing market crash.
Reports from NAR for November 2018 indicates an increase in existing home prices, lower home sales compared to November 2017 and higher days on the market (DOM). While there is a fall in demand for upmarket homes, it is the affordable range where there is money to be made with demand outstripping supply.
While figures in November are an improvement over October 2018, there is a decline over last year regarding condominium and co-op sales. There is a fall in the total housing inventory from October, from 1.85 million units to 1.74 million units.
Home prices would go North by 5% over the next few months in 2019 and there would be an increase in average monthly mortgage payments to $994 this September from $912 last fall according to S&P CoreLogic.
Zillow expects average US resale home prices to increase at the end of 2019 by at least $12000 .
With growing listings and a booming US economy, home prices are expected to increase at the end of 2019 by 5%.
Keeping the above background in mind, here are the 8 numbers that can help you decide which property is worth a buy
The debt-to-income ratio or your total gross monthly income to monthly debt payment obligations should ideally be 36; however, this depends on some other factors like your credit score or cash reserves. For gross income to total housing payment, the ratio is 28%. The ratio is 45% for investment property.
There is a vast difference between down payment for self-occupied properties versus investor mortgages. While FHA loan down payment for owner-occupied properties is as low as 3.5%, the figure for investor mortgages is as high as 20 to 25% and can go up to 40% depending on your debt-to-income ratio, property price, credit score and expected rent. Gift funds cannot be used for investor mortgage down payment.
It is not sufficient to have rental income when opting for a mortgage. You should have been an investor for at least 2 years, had rent loss insurance coverage for at least 6 months and factored in negative rental income as debt while calculating the debt-to-income ratio.
This compares the median household price in a given area to the median household income. The current ratio is 4.2 which is significantly higher than the 2011 figure of 3.3 according to the Joint Center for Housing Studies.
The median home prices are compared to the median rent in this ratio for a specific market. Well, if the ratio is below 15, it would be wise to be an end user. If the ratio is over 20, then be an investor.
You get this ratio by dividing annual rental by the total property cost. The total property cost comprises the purchase price, closing and renovation costs.
This is a more effective ratio compared to gross rental yield as it considers net rental yield after deducting operating expenses of the property like repairs, taxes, agent fees, vacancy costs and landlord insurance.
While calculating your cash flow as an investor, be sure to factor in the negative cash flows when there is a vacancy, emergency maintenance costs or high borrowing costs. You are safe if you have cash reserves over and above the monthly rent to pay for the mortgage principal, interest and insurance.
Good times are around the corner for the US real estate investment market and all you have to do as a first-time player is to get your numbers right! So start the number crunching right away and make a remunerative choice.
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