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Determining Value

AllCash4Property profile photo
  • Friday, October 10, 2003 @ 03:40 PM EDT
  • 3 Comments

How do you determine the future value of a home base on the market and the economy?

Secondly what do you look for in the economy to determine where the market is heading?

Comments(3)

  • no photo
    flacorps10th October, 2003

    All other things being equal, home prices in the aggregate respond like bonds to the bellwether mortgage interest rates. When rates are down, prices are up. When rates are up, prices are down.

    However, individual home values can be influenced by conditions too myriad to list. In an owner-occupied market with few renters, it is almost impossible to get a positive cash flow renting unless you have lived there a long time and are simply moving out and making a rental out of it.

    In a rental-dominated market, the home's value is dictated by what it will rent for ... just find out what cap rate investors demand for those homes, and you'll know what to pay for any one of them. Try not to fall below a double-digit cap rate, regardless of what others are doing.

  • no photo
    AllCash4Property10th October, 2003

    Very insightful although I was think more on the lines of speculation.

    Like if the unemployment rate is up housing prices will drop. etc.
    Consumer confidence is down
    Specific researchable economic indicators

    In addition what do you mean by "Cap"

    Thanks

  • no photo
    flacorps10th October, 2003

    The capitalization rate is a measure of how quickly you are paid back for your investment. If you spend $100,000 on a property with a 10% cap rate, you'll get $10k/yr of income out of it. If the cap rate is higher, you'll get more. If the cap rate is lower, you'll get less. Cap rates in a market trend up and down depending on the general economy and on whether the area is viewed as desirable or not. If the area is becoming more desirable, one will accept a lower cap rate in the hope that it will increase. If the area is becoming less desirable, a buyer will demand a higher cap rate to compensate for what the buyer percieves will be diminutions in the future income stream.

    People can sometimes buy mobile homes on leased sites at $6k, and clear $250k/mo. after expenses. That's a 50% cap rate, but mobiles depreciate, and within a few years you'll have an untenantable pile of junk you'll have to pay to dispose of.

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