Some comments from our resourceful intern, Maija – This is the time when many people are pondering over whether to buy or rent a property. While great amount of prospective buyers are deciding to rent there is also some encouraging facts that support buying. Forbes Magazine just published an article Ten Cities To Go From Renting To Buying where top10 areas to buy are listed. It’s definitely good news for Chicago relocation as we can be found in the third place.
In short, think how much money you pay for your rental and compare it with the amount you’d pay for mortgage each month. At the moment the premium is way smaller than the average of the past 15 years. And the areas that made to the top 10 are the places home prices are going to climb the most in the next 5 years according to Forbes.
Basically this means that in these areas it is cost-effective to buy a house instead of keep paying rent. Maybe it is a good time to upgrade — especially since many of the prospective buyers could benefit from the extended first-time home buyers’ tax credit.
Maija Harjula has joined Baird & Warner’s Relo Team as an intern this year. A native of Finland, she actually considers Chicago winters to be WARM. Soon to be an expert on Chicago relocation – Maija provided this welcome video – She will be updating us on Chicago neighborhoods through early summer.
Chicago real estate VP of Strategic Development for Baird & Warner – John D’Ambrogio - was recently published in the February issue of Mobility Magazine with his article Losing sight of Corporate Culture – Securing Your Brand in a World of Mergers, Acquisitions and Recession. John’s piece offers perspective and insight about corporate culture and the value of a good brand in the business world. The article is also conveniently available online.
In the 21st century branding has become an even more important part of corporations and their operations. In the article John discusses brand value and ways to keep it, or earn it, in a remodeled business world challenged by mergers, acquisitions and recession.
Take moment of your day to read the article to hear John’s view on branding and the importance of it!
A recent report by TransUnion, the credit-scoring giant, has some stunning information that really helps crystalize the way many people look at their homes today. According to TU, since the recession really got going, the old concept of “mortgage payment first, credit and other payments second” has gone tipsy turvey – People are paying the credit card payment and THEN, if there is anything left over, they are paying their mortgage. A “hierarchy reversal” as they call it.
Does that mean that people no longer care if they lose their home; that their concern is more about keeping available credit open; or that they don’t see logic paying down an asset that is worth less than the balance? Whatever the reason, TU predicts that this is a temporary change, and the world will go back to normal as we come out of this economic climate. For the sake of Chicago real estate, we hope that happens soon!
So, now that we know about cash flow and depreciation in Chicago luxury investment property - what about capital repayment and appreciation? Everyone knows the latter (isn’t that why we’re in this current crisis?) But many people forget the obvious advantages of the former! Back to our earlier post about $3000/mo. PITI and a $5000/month in rental income – let’s forget for a moment about the obvious profit (and tax liability) there. Let’s remember the REAL point – Someone else is paying your PITI (principal, interest, taxes and insurance)! Obviously you have a down payment being tied up and not earning (or losing) money in equities or other investments, but the money in / money out is being taken care of by your tenant. So while they’re not gaining any equity – you are. There are thousands of amortization tables out there (try this). It may only be a few thousand dollars in the early years (interest is always somewhat front end loaded) but in the course of thirty years – guess what – someone paid off your investment property! And each year you’re receiving the same (or presumable more) rent off the property. So in a simplified world – If you hold this property for thirty years charging $5,000/mo in rent at the end of thirty years you’ll have no mortgage and a cash flow of something in the arena of $60,000 annual income on the property. And you never (hopefully) went “out of pocket” to pay it down.
Now it won’t be that simple of course, but capital repayment is probably the most overlooked of the ways to grow wealth in luxury real estate investment. The final way, appreciation, is self explanatory, except for one thing that everyone has forgotten – the antonym: depreciation. The good news, however, is that over a long term hold period you are historically (almost) guaranteed some appreciation. Just don’t bank on it the way everyone has in the past. Look at the four factors, invest wisely, and someday you can kick that tenant out of that luxury rental and move in yourself – rent free!
“But you must pay the rent”
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