Grace Townsley
January 14, 2022
Happy Weekend... and Weeknd!
The Weeknd has gone from blinding lights to blinding price tags. His ritzy downtown LA penthouse just hit the market for a staggering $22.5M. He made the purchase three years ago for $21M, so he stands to make a cool $1.5M profit. And that’s not all he’s up to! The singer also snagged a massive Bel-Air mansion last year for $70M and sold his Hidden Hills mansion to Madonna for $19.3M. Frankly, we can't feel our face when we read those numbers.
- James and David
In yet another blow to bruised and battered buyers, this week’s mortgage rates hit their highest level since early 2020. They’ve been rising steadily since the beginning of the year, but Monday’s peak of 3.64% was a painful shock to buyers who haven’t locked in their rates. Blame the rate spike on the Federal Reserve announcing anti-inflation measures.
What do rapidly rising rates mean for the average buyer? On a $350,000 home with a 20% down payment, this week’s rate increase added about $125 to the buyer’s monthly mortgage. The cost is much higher for buyers using FHA or VA loans that have a lower down payment. Considering the average interest rate last month was just 3.1%, it’s been an expensive two weeks for buyers who waited.
We expect interest rates to continue rising this year… probably not as much as we’ve seen over the past two weeks, but there’s still room for growth. While it does make purchasing more expensive for your buyers, in the long run, slowing inflation is a good thing for our economy. And if it’s good for the economy, it’s good for the housing market.
How can residential investors compare the ROI of two different properties? In commercial real estate, investors use a metric called the capitalization rate to calculate the ROI of a potential property. They get this number by dividing the purchase price of the property by the net operating costs (that’s rental income, minus taxes, insurance, maintenance, and other expenses). They use this figure to easily compare multiple properties across different metros and then choose which one has the best income potential.
If we use that same metric to compare the top 50 markets for residential rentals, we find that the cities with the highest scores tend to be affordable areas with low sale prices and high rental activity. These are the best and worst scoring cities, ranked by capitalization rate:
The top 3 highest-scoring cities
The 3 lowest-scoring cities
While this metric is a great starting point, more goes into ROI than just income minus expenses. You have to consider features like walkability, the school district, and overall safety. If you’ve helped your client find a winner, protect their bottom line by encouraging them to get a full inspection and a comprehensive home warranty that covers the property and appliances.
According to Zillow, the Sun Belt states are now two-time hot market champions. The Sun Belt includes states in the southernmost third of the country, like Florida, South Carolina, Arkansas, Texas, Arizona, and also Southern California. All 10 of Zillow’s 2021 most popular markets are in these southern states. These markets are appealing because they offer strong job growth, relative affordability, and a healthy dose of vitamin D.
In 2022, the Sun Belt is expected to continue its meteoric growth. Zillow predicts home price growth will surge in Tampa, Raleigh, and Jacksonville, but will drop in pricier markets like Austin and Phoenix.
No matter where you or your clients live, you can capitalize on this trend by helping them purchase rental properties across these southern states. To position yourself as the go-to agent, start by building a strong contact network. You’ll need to find mortgage brokers, agents, contractors, and property managers in each market you hope to sell in. In every sale, treat your client’s money like it’s your own money! That means doing your research so you know these out-of-state markets as well as your own.
The news that just missed the cut
Advice from James and David to win the day
When you’re working with buyers who are struggling to scrape together their down payment, you should guide them toward buyer assistance programs. All 50 states now offer financial help to qualified homebuyers, if you know where to look! Here’s a quick rundown of the buyer assistance programs most commonly available:
Many of these programs can be layered, saving your buyer even more cash. You can learn more about the homebuyer assistance programs available in your state here.
Keep the latest industry data in your back pocket with today’s mortgage rates:
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Thanks for spreading the word. We'll see you on Tuesday!
- James and David
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