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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Terry Whitman who wrote (6112)	5/16/2002 9:05:33 AM
From: Steve Lee	Read Replies (1) \| Respond to of 33421

I used the "one percent rule" when buying rental properties. The monthly rent must be one percent or higher than the purchase price and cost of any initial renovation. I sold my last properties this year (apart from the house I live in) because they had gone above the one percent rule by a significant amount based on their market value. The values had doubled in five years. They were all similar properties on the same housing estate. During those five years the rents I charged went up by about 17%. I would love to buy some more because it is a great and easy way to make money. But I can't justify the values. I don't think rents will rise much because incomes won't support that scenario. So it seems logical that prices should come down from a landlord's point of view. BTW, I am in the UK if that makes any difference. The average salary is about £19,000 and the average home price is about £103,000. Mortgage companies generally let you borrow a multiple of 3.5 times the main wage earner's salary plus 1.75 times the second wage earner's salary. Normally the buyers are required to put 5% of the purchase price in themselves but that has been relaxed in the last few years. So a typical couple would be able to borrow just under £100,000. That is only just about enough to buy a typical house so from a buyer's point of view, I don't see the property market rising. Rates float (i.e your payment goes up and down dependent on bank base rates) with normally a 2 - 5 yr introductory period of fixed or discounted rates. The mortgage company will then claw back your money by tying you in for a few further years whereby if you switch lenders, you pay a hefty penalty of something like 6 months' interest. A repayment mortgage on a typical house might cost you £600 - 700 /mth for the initial period and then a little over £1000/mth thereafter. If interest rates rise then a lot of people will be shafted. Furthermore, a popular mortgage scheme in recent decades was the endowment mortgage. This involved making a payment which consisted of interest only, combined with a payment into a stock based fund that would be estimated to pay off the capital at the end of the loan (normally 25 yrs). You don't find out how well the fund has done until the 25 years are up. A lot of people are getting disappoinments and many more have disappointments awaiting them. People who have been looking forward to paying off their houses are finding themselves short and too old to get another mortgage. Timebomb IMO.