Whether I’m speaking to a $3mm buyer, or a $500k buyer, some of the conversation is the same- mortgage rates are simply too low to pass up.
Even someone who can afford to pay cash is taking advantage of rates.
At a 40-50% effective tax bracket, along with the tax deduction of mortgage interest, turns 4% money into 2-2.5% money.
How do you say no to that?
When the tax deductibility of a rental is zero, the option of purchasing an equivalent property becomes more and more interesting?
The stock market has outpaced the sales market since 2009.
With the market touching 13000 recently, and certain investments showing time to hit the exits, making a purchase using cash or money that’s been in the market seems like a logical choice.
- Time to deploy cash in an apartment?
Interest rates are fairly stable across loan amounts.
I’ve written about this many times, but I will share a couple of funny stories from the last few weeks about how challenging lenders are being:
1) A buyer who was going to combine
her current apartment the the purchase of her neighbor’s apartment had no mortgage on her apartment- but wanted to take a modest (under $417,000) mortgage on
the neighbor’s unit- the day before the closing, the
lender asked for a letter from her coop board approving the combination before she closed.
If this sentence makes no sense, I’ll explain.
The order usually is: Sign a contract, get a loan, get board approval, close on the purchase, apply for whatever work you want to do with the coop board, get approved, do the work, end scene.
The lender eventually understood how out of order their expectations were, but not without some genuine legal threats.
2) Appraisals are taking 2-3 weeks to schedule once a contract is signed.
This delays is incredibly frustrating for buyers and sellers- since rate locks are only 60-90 days, and as we approach the time of year when boards do not meet, every buyer is trying to get his/her board package in before June/July.
3) A happy ending:
Recently we had a listing we took over from another firm, when a deal in contract fell apartment- due to the lender.
However, we discovered that the buyer could not get financing due to income, and nothing else.
When we brought a qualified buyer to contract with the seller, she was able to get a loan within 3 weeks.
So, money is available.
Go and get it!
The question is really one of getting the best rate in this environment.
If rates are hovering around 4% for fixed loans, and interest-only products are around 2.5-3%, what do you do?
Certainly, just use common sense- if you’re planning to stay for 5 years or less, be very sure of that, and take the rate with the lowest product you can find.
If you’re not sure, get a fixed product.
There are some cooperative boards who don’t allow buyers to take interest-only loans- and certainly as rates rise, it will be the rare owner who regrets having a fixed loan at these rates.
But I almost forgot to write about the cost of rentals.
Using 1-bedroom rentals in doorman buildings- if the cost of a rental is $3500 on average, and the cost of a purchase is approximately $600,000 with an $1100 maintenance- the cost of the
monthly carry
with an interest-only product (assuming a 5-year move) is $2700 right now, with 20% downpayment, or $3325/month in a fixed product- and this is before any tax deductions!
This will drive many, many sales over the next quarter or two, or three.
There’s too much 1-bedroom inventory still lingering, and not enough rental property, by a LONG shot.
The same argument works for bigger apartments, when rates are
this low.
The three-bedroom unit which is asking $8000-10000 rent in a prime location may cost about $10,000 per month- assuming a $2mm purchase price, with 20% down, and $2500 per month in maintenance.
This again is before any tax deductions.
The moving pieces become location, how much renovation a property needs, and the monthly maintenance.
This seems like a fairly obvious comparison to make right now- I’m happy to discuss it further with anyone out there!