Property Value & Interest Rates
When is a good time to sell?
Interest rates are starting to climb from 2014 when they were the lowest they’ve been in 30 years. Yes, 30 years. With rates starting to climb, the value of your property may drop 7% or more. In real estate economics 101, it works like this:
1) I, an investor, buy your $1M property today with a 4% interest rate.
$1,000,000 price
$350,000 or 35% down
$3,100/month principal and interest
$15,000/year net or 4% return.
I find this acceptable.
2) What happens next year with a 5% interest rate?
$1,000,000 price
$350,000 or 35% down
$3,475/month principal and interest
$10,416/year net or 2.78% return.
I think I’ll invest elsewhere.
So, your property value drops.
3) Instead, a 5% interest rate dictates a $930,000 value.
$930,000 price
$325,500 or 35% down
$3,232/month principal and interest
$14,220/year net or 4% return.
At this price, it’s worth it.
However, there are exceptions!
While it’s hard to find a neighborhood in Los Angeles that isn’t considered “hot” by someone, there are certain areas where patience will help build value in your property. Email me for a free, thoughtful valuation of your property.
If you’re a buyer, what does this mean? If you’re buying with all cash, WAIT! When interest rates rise inevitably, you’ll have the funds to get those great deals. If you want to use a loan, however, take advantage of great interest rates NOW. This low interest rate level may not happen again in your working lifetime. Just make sure you work with a buyer’s agent who knows how to spot a good deal so you don’t overpay (hint: me).