Let's Talk Leverage

When throwing around housing prices, appreciation percentages, down payments, mortgage payments, and the like, you end up with a lot of big numbers. It's easy to look at a home appreciating 10% in a year (a reasonable number in many parts of the San Francisco Bay Area) and be astounded that in a year you can earn $80,000*.

But let's take a closer look because you didn't just earn 10%; if you put 20% down, you earned not 10%, but 50% return on your investment. Yes, you read that correctly: 50% ROI. To understand how this works, you need to understand leverage.

Leverage, in the most simplistic terms, means that you are using something to its maximum advantage. Keep in mind I'm going to stick to easy, broad numbers for the sake of simplicity but you can really drill down to the pennies, interest rates, and total expenses incurred if you so choose (and for true accuracy to your situation, you may want to do that -- and ask your financial professional for help).

Example:

Purchase price in 2015: $800,000

Downpayment (20%):  ($160,000)

Home value 2016:  $880,000

Increase in value:     $80,000 (10%)

Output (downpayment): $160,000

Earnings (appreciation): $  80,000

Return on initial investment: 50% ($80,000/$160,000)

If you put down less money you are more highly leveraged and your return can be even greater on a percentage basis:

Example:
Purchase price 2015: $800,000

Downpayment (10%): $80,000

Home value in 2016: $880,000

Increase in value:        $80,000 (10%)

Output (downpayment): $80,000

Earnings (appreciation): $80,000

Return on initial investment: 100% - Doubled your initial investment

Wow! Where else can you have the potential to earn such amazing returns on your capital these days? I know, it's pretty impressive. Still, I would be remiss to not warn of the flip side of being highly leveraged which is that should the market experience a correction you may not have the cushion of equity that comes with a larger initial output (downpayment) to stay in the black with your head above water. 

Everyone's situation is different. Ask yourself questions to determine what strategy is best for your longterm (or short term) goals. Is owning real estate part of your investment strategy, or is the investment in homeownership less of a consideration than buying your family a home? Are you considering selling and wondering if you've held your property long enough to realize your desired return? What will you do with the proceeds when you sell your home? What do you risk losing if you wait to take the first step? What can you gain by taking that first step today instead of tomorrow? Call or email me today if you're ready to take that first step.

*Please note all the numbers used were pulled out of thin air for the sake of the examples and offer no guarantees or promises of market returns, appreciation in the coming year(s), or anything else that would otherwise require a crystal ball.

Homeownership is getting easier

When I speak with people about how to buy a house one of their first concerns is about the downpayment. When homes in Alameda County have an average price exceeding $800,000 (Oakland is averaging under $500,000) a downpayment of 20% or even 10% can seem totally out of reach. How do you save $80k-$160k for a downpayment (and an additional 2-3% for closing costs)? It can be a daunting thought that can make the most astute savers' knees wobble. Well, Fannie Mae, the government department which essentially sets the rules for lending by commercial banks and lenders, is loosening up the pursestrings a bit.

For some time now unless a buyer got an FHA loan the minimum downpayment was 10% of the purchase price. However, as of December 12, 2015 that minimum is being reduced to 5% for conforming high balance loans (loan amounts up to $625,500 in high cost areas like ours). This is great news for people who can afford the costs of being a homeowner but have trouble saving 10% or more for the downpayment.

For buyers currently in the market who have been planning on putting down 10%, they now have more purchasing power. Now with just over $30,000 you can buy a home around $650k instead of $300k -- that's a pretty sizable difference in the type of home and neighborhood you can afford! If you're in this kind of situation remember to run the numbers to see how an increased purchase price will affect your monthly payments.

This is fantastic news for so many people and will allow more people to realize the security and comfort of homeownership. It may even translate to more inventory as it could also provide sellers with more options for where to buy when they sell.

I work with a variety of loan officers whom I am happy to connect you with if you'd like to learn about how this new change can affect your 2016 living situation. Call or email me today -- don't wait to start planning your next move. It's better to begin early and be prepared than to rush and try to catch up with your competition.

Rents on the Rise (Again!)

According to this post on sfgate, rents in San Francisco have gone up yet again and now average $3,458/month for a one-bedroom unit.

Most people continue to rent because they don't think they have the money for the downpayment -- 20% of the rising sales prices. But you don't need 20% down to buy a house! Did you know that you can buy a home with as little a 3% down?

If you rent an apartment for $3,000/month, you could own a $417,000 condo for $2,700/month -- that leaves you with an extra $300/month for your utilities and other expenses.

As both rents home prices continue to rise, doesn't it make sense to spend the same amount per month on a property whose increasing value means money in your pocket -- not your landlord's?

Are you concerned you'll have trouble finding a property for under $450,000? Trust me, there's more out there than you think -- email me for a list. Still, if you find your tastes are a bit more expensive, you still have the ability to purchase with only 10% down (up to $1m purchase price!).

There are creative ways to put together your downpayment and closing costs; with a professional history in mortgage lending I can give you some ideas to get you started.

So, what's your excuse?