Real Estate Agent with eXp Realty of California Silicon Valley Probate, Trust, and Investment Sales B.R.E. 01191194
October 05, 2017 09:27 AM
Many of my Silicon Valley Investors are finding that the price it costs to purchase an investment rental property in someplace like Palo Alto, Mountain View, or even downtown San Jose has gone up much faster that the rental market value has. It is not unusual to see CAP rates of 1 or 2 % which is the return on your investment after expenses are paid, but before any costs for a mortgage. So if your mortgage is 4.25% for an investment rental property and you only make 2% after expenses and before a mortgage you will lose 2.25% in cash flow over the year. What that means is that on a million dollar property with a $700,000 loan you will have a negative cash flow of about $17,500 every year. When the market appreciates you make up for the loss in appreciation, but when the market goes down, you lose the negative cash flow as well as the decreased value in the property.
In order to keep your cash flow, at least neutral, you need to have a CAP rate closer to your mortgage, which you can do by becoming a Santa Cruz rental property owner.
If a Santa Cruz rental property owner buys a million dollar property at a 4% CAP rate and a loan of $700,000 at 4.5% the difference between profit and loan payments will only be about $3500.
These numbers are not exact as loan rates change daily and amortization schedules are different, but the bottom line is the lower the CAP rate the worse the cash flow.
Due to the prices in Santa Cruz being so much lower than the prices in the Silicon Valley and the rents being fairly equivalent, the cash flow and CAP rate are just better for Santa Cruz rental property owners.
UC Santa Cruz posts average rental rates every year.
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