The Mitten Real Estate Team

Introduction:

At Mitten Real Estate Team we are pleased to bring you our latest Blog Article about interest rates and their effect on the real estate market.  It is our hope that as a current or potential real estate owner/investor this article will help you be able to understand how interest rates affect the real estate market.

Interest Rates:

Interest rates are essentially the ‘time value’ of money.  The interest rate is how much a borrower pays a lender for the use of their money.  Additionally, interest rates are also meant to compensate the lender for the risk of loaning the money to the debtor since there is not a 100% guarantee it will be repaid.

Central Bank Interest Rate: (Also Known as the overnight interest rate or key interest rate)

The central bank interest rate in the interest rate at which the central bank of a country lends to domestic banks.  These loans are very short in duration and are used because the amount of money a bank has fluctuates daily based on its lending activities and its customers’ withdrawal and deposit activity, the bank may experience a shortage or surplus of cash at the end of the business day. Those banks that experience a surplus often lend money overnight to banks that experience a shortage so the banking system remains stable and liquid. (Source: Investopedia)

The Central bank interest rate (overnight interest rate) is a very important interest rate because it affects the rates at which banks lend money to customers as well as other banks, which has a large influence on the economy and employment.  The Bank of Canada makes announcements on interest rates eight times a year, the exact dates are decided on each year and the dates are published.

Prime Rate 

The ‘prime interest rate’ is the interest rate at which commercial banks lend to their most credit worthy clients.  Although the prime rate is closely related to the central bank rate set by the central bank it is not the same as the central bank rate, and is somewhat higher than the central bank rate, depending on the bank.

Inflation and interest rates:

Inflation is referring to a loss of purchasing power over time resulting from the rising price of goods and services.  For example if a package of gum was $1.00 today and the inflation rate was 2%.  In one year the pack of gum would cost $1.02.  Inflation is measured using the consumer price index (CPI), which is essentially a bundle of goods and the market price of each is monitored to determine inflation.  Most central banks aim for an inflation rate of 1-3% which is viewed as being healthy for the economy.  As a general rule as the economy strengthens inflation tends to rise, if inflation gets out of control then purchasing power can be eroded too quickly, so the central bank will raise interest rate to slow inflation, which also slows the economy.  Alternatively if the economy is weakening and inflation is stagnating the central bank will lower interest rates in help strengthen the economy.

There are several economic theories that explain these concepts in detail but they are beyond the scope of this article.

Interest Rates and Affordability:

When interest rates are low people are more likely to borrow money so that they can make investments in productivity (such as equipment, hire new employees and invest in their businesses etc…), because borrowing the money is relatively inexpensive.  This borrowing and investment in productivity in turn stimulates the economy to grow and often eventually causes an increase in inflation as a result.

When inflation rises the central bank raises interest rates.  When this happens the interest rate for borrowers increases and it becomes more expensive (less affordable) to borrow money to invest in productivity, thus less people borrow money and most business/people will cut back on spending thus slowing the economy and inflation.

Interest Rates and Investments:

As a general rule when interest rates are low, debt investments such as bonds tend to have a lower yield making them less attractive to investors, during low interest rate environments’ equity investments such as stocks in companies tend to be more attractive to investors because the companies are able to make use of the inexpensive debt to grow and offer a higher yield to investors.  This coupled with the low yields of debt investments tends to make stocks more attractive to investors when interest rates are low.

Interest Rates the Real Estate Market:

When interest rates are low financing of real estate becomes more affordable then when rates are higher, thus allowing more people to ‘afford’ real estate and this in turn can put an upward pressure on prices of real estate.  However, interest rates are usually lower when the economy is weak which can mean less people are in a position due to unemployment etc…

To see the effect interest rates can have on affordability let’s look at one example:

If a person took out a $300,000 mortgage on home at a 3% interest rate with a 25 year amortization their monthly payments would be $1,419.74

If the same person took out a $300,000 Mortgage on a home at a 4% interest rate with a 25 Year amortization their monthly payments would be $1,578.06

As you can see from this example if interest rates are 1% higher the same $300,000 mortgage would cost the borrower an extra $158.32 a month in interest.

However as was mentioned earlier even though housing becomes more expensive to finance when interest rates are higher, usually the economy is stronger as well which means people can afford to spend more since they may be making more money.  Nonetheless higher interest rates can put somewhat of a downward pressure on home prices.

An additional market phenomenon is that often after a potential raise in interest rates is announced there is a short period where the real estate market actually increases in activity.  The main reason for this is that potential purchasers who have already been pre-approved at low interest rates will ‘rush’ to buy before their pre-approval at the lower rate expires.

Conclusion:

To conclude at Mitten Real Estate team we hope that this article has helped you better understand interest rates and how they affect the real estate market.  As always if you have any questions about this article or any other real estate related questions please contact we are always happy to help you and we always have time to help you plan for the future.  We can be reached through this website, by e-mail at dbmitten@mitten-realty-services.com or at 604-882-8384.

Sincerely,

Doug, Bonnie and David Mitten (Mitten Real Estate Team)

We are pleased to bring you our latest article in our ongoing ‘Neighborhood Market Focus’ series.  This article takes an in depth look at Langley’s Walnut Grove neighborhood.  This report was done as part of our ongoing market research and as a service to our clients and potential clients

Community Description:

Walnut Grove is a nice community located at the northern side of Langley township, directly South of the Fraser River and north of highway 1, with Port Kells, Surrey to the west and Fort Langley to the East. .  Walnut Grove was developed into an urban area mainly through the 1980’-1990’s, although some developments are more recent.

Walnut Grove is a well planned walkable community with numerous walking and biking trails and a good road network.  Walnut Gove has many community amenities including several parks and schools with the most notable being Walnut Grove secondary school and the Walnut Grove community center.  The recreation center is an excellent facility which has an indoor pool, gym, gymnasium, library, outdoor tennis courts and numerous sports fields and a running track.  Walnut Grove has a number of amenities in its commercial areas, such as grocery stores, the colossus movie theatre, Sportsplex ice and roller arena and numerous restaurants, there is also a growing commercial/ industrial area in the north west corner.

The Walnut Grove Community Center

The Walnut Grove Community Center Pool

The Colossus Movie Theatre

Sports Plex Ice and Roller Arena

Walnut Grove has a diverse array of housing options from seniors retirement residences, to apartments, townhomes, adult oriented town homes in gated communities, single family homes and even some acreages.  Overall walnut grove is a safe friendly well planned community in Langley Township.   

Apartments

During the July 10 – August 10, 2014 time Period there was 4 sales of apartments in Walnut Grove which was a notable drop compared to the 6 sales during the same period last year.  The Home Price Index (HPI) for apartments in Walnut Grove also saw a drop of 2.89% compared to the same period one year ago, however the average days that it took for apartments to sell dropped by 50.42% to 59.5 days.  This would seem to suggest that although prices have dropped somewhat from last year sales are happening more quickly meaning that buyers are likely becoming more receptive to apartment asking prices compared to last year resulting in quicker sales.

Townhomes

During this time period there were 12 sales of Walnut grove townhouses, 6 of which were adult oriented.  This is down notably from last year when there was 22 sales of townhouses (9 of which were adult oriented) in the same time period.  The Home Price Index for townhouses in Walnut Grove saw a modest increase of 1.01% compared to the same time last year, and the average days on the market required to sell decreased to 31.7 days.  Overall this would seem to suggest that the market for townhomes in Walnut Grove is strengthening slightly, however most of the strengthening can be attributed the Adult oriented sector of the townhouse market.

Single Family Detached Homes

During this Time Period there were 14 sales of single family detached homes in Walnut grove which was down from 20 that occurred during the same period last year.  The Home Price Index for single family homes showed a respectable gain of 5.43% compared to the same period last year while the time to sell was significantly decreased to only 11.3 days.  This data would suggest that this segment of the market is ‘heating up’ as the demand for this type of housing in Walnut Grove is high resulting in quicker sales and rising home prices.

Acreages

Although there are a few acreages that are sold in Walnut Grove, this segment of the market is very small and sales are relatively few and far between, making analysis difficult, however at current there are 4 acreages for sale in Walnut Grove.

Active Listings 

There are currently a total of 145 active listing in Walnut Grove, with 61 properties being listed within the last 30 days.

Conclusion

In conclusion as we have seen in other areas the market in walnut grove varies significantly based on the market segment.  The apartment market has seen a modest drop in prices but a decrease in how long it takes for apartments to sell suggesting that prices may start to stabilize or at least see a slower decline in the future if other factors stay the same.  The Townhome market is starting to show a very modest bit of strengthening however looking through the data it would seem that this can be mainly attributed to a strengthening in the Adult oriented Townhome market, which is not surprising given the lack of any new construction of adult oriented townhomes and with aging demographics it seems reasonable to assume this is a trend that should continue if other factors stay the same.  Single family detached homes in Walnut Grove are continuing to show strengthening as the demand rises for this type of housing, prices have risen by 5.43% in the last year and the time required to sell has dropped to a quick 11.3 days on the market.  This would seem to suggest that if other factors stay the same the single family detached homes market segment in Walnut Grove may continue to see a strengthening in the near future.

As always if you have any questions about this article, any other real estate related questions or you are thinking of buying or selling  please contact us we would be happy to assist you.  We can be reached either through this website or by calling 604-882-8384.

Sincerely,

Mitten Real Estate Team

Here is a link to the latest fraser valley real estate board market statistics for July 2014.

http://www.fvreb.bc.ca/statistics/Package%20201407.pdf

Next week we will be featuring a market update on another local community so please check back soon.

As always if you have any questions about this article or any other real estate related questions please feel free to contact us we would be happy to assist you.  we can be reached through this webiste or by phone at 604-882-8384.

Sincerely, 

Doug, Bonnie and David Mitten

(Mitten Real Estate Team)

If you have ever thought about investing in a rental property but are unsure if it made financial sense this article is for you!

Buying a rental property is very different from buying your personal home, in that a rental property in a financial investment and it must generate a reasonable return on your investment in order to be worthwhile.  So how do you know if buying a rental property is worthwhile? Keep reading to find out…

As a real estate investor you must analysis properties from a finance perspective…  A very important finance calculation is the C.A.P rate.

Capitalization Rate

The Capitalization Rate (Cap rate) is a mathematical expression how much monetary return you will receive on your investment.  In other words the percentage return an investor would receive on an all cash purchase.

The Formula is:

Essentially to determine the capitalization rate you take the net annual operating income(NOI) and divide it by the purchase price of the property.  However before we can determine the cap rate of a property you must determine the annual net operating income.

Annual Net Operating Income

The calculation for determining the annual net operating income:

So to calculate NOI you would take the gross operating income (annual projected rent) and subtract all the operating expenses.  Operating expenses would include thing such as:

-Insurance

-Property Taxes

-repairs and maintance

-Property Management (if applicable)

However, it is important to note a few expenses are not part of the NOI, these include income tax on profit and mortgage interest.

CAP Rate Example

To demonstrate how to use cap rate here is a fictional example…

$510,000 Basement Home in Walnut Grove, 2400sqft with double garage, This home has a projected monthly income of $2,500/mo.

2,500 x 12 = $30,000 (Annual Gross Rental Revenue)

Operating Expenses are:

$2,500 /yr insurance +

$3,600/ yr Repairs, +

$3,600 / yr Property Taxes

Total Operating Expenses = $9,700

Using the above formula we can calculate NOI to be $20,300

From this we can use the formula determine the cap rate…

20,300/510,000 = 3.98% So the capitalization rate of this particular (fictional) home would be 3.98%

From this we can also determine the payback period as follows…

510,000 / 20,300 = 25.1 Years or 301.5 months.

The Payback period refers to how long it will take to recover your investment through collecting  net income genrated by the property..

Now, of course our example assumes that an investor plans to hold the rental property indefinably, but in reality many investors do sell properties at some point in which case they may also realize a profit when they sell their property especially if they have held it for many years.  Any gains in property value made at the time of selling would usually be subject to capital gains taxation, just as most other investments would be...

Uses of Cap Rate:

• Cap rate can be used to determine the fair value of a rental property compared to other properties in a similar area.

• Cap Rate can be used to decide between investments types eg.( Real Estate v.s bonds)

• Cap Rate can also indicate risk, for example properties in one area of a city may have a higher cap rate because there is less demand for rentals in the area so they carry a higher risk of vacany. Some other examples of risk that can affect cap rate are, age of a property, credit worthiness of current tenants (if applicable), length of lease in Place (if applicable), etc…

• Cap rate can also be s sign of how much demand there is in the market for a certain type of property, meaning if a trend of cap rate decreasing for a certain type of property is observed, the market for this type of property is heating up and prices are being bid up thus reducing the cap rate.

What About Vacancy?

Vacancy is an important consideration for potential investors. And on the long term vacancy does effect cap rate.  However the expected vacancy rate can vary significantly based on the area type of property etc…

Example: If in the area a 2 week per year vacancy was expected you would deduct half a months rent from the Gross Rental Revenue.

For the example we discussed above this would reduce the Gross Rental Revenue to $28,750 (from $30,000) and the NOI to $19,050 (from $20,300) resulting in a C.A.P rate of 3.74% and a 26,8 Year (or 321.3 months) Payback period.

Thus projected vacancy is an important factor to consider when calculating cap rate, but the projected vacancy rate will vary based on area and the type of property.

What about Mortgage/Financing Costs?

Mortgage payments are generally not included in the calculation of C.A.P rate.  The reason for this is that financing costs from leveraging can very significantly based on credit history as well as down-payment etc.. which would result in a skewed CAP rate if they were included. 

However interest expenses on mortgages of investment properties are usually tax deductible so using a mortgage (leveraging) when investing in real estate can have tax benefits, talking with an accountant would be advisable if you are considering using leveraging (a mortgage) when purchasing a rental property as a way to reduce tax on the revenue.

Although it is not included in CAP rate calculations, financing is a very important aspect in determining if a rental property will make sense financially.  Speaking with a good mortgage broker about you ability to finance the purchase and the interest rate avaible is advisable. If you are thinking of buying a rental property using a mortgage and you are not currently working with a Broker please contact us and we can direct you to good mortgage broker who can disscuss what financing options are avalible to you.

Conclusion:

As a current or potential real estate investor, Capitalization rate and other financial considerations are key to making sure that you receive a good return on your investments, which is why we have written this article as a service to our current and future clients, that will help them better understand the finance apect of investing in real estate rental properties.

  This article should be considered as a good introduction to some of the useful finance concepts that can be used when deciding to invest in rental properties.

This article is however, not intended to be a comprehensive guide to the finance side of real estate investing.

 If you are thinking of investing in rental properties in B.C’s lower-mainland as part of your investment portfolio please contact us we would be happy to discuss some of the finance concepts you should consider when investing as well as assist you with finding a property that would suite your investment goals. We can be reached through this website or by phone at 604-882-8384.

Sincerely,

Doug, Bonnie and David Mitten (Mitten Real Estate Team)