- 31 Mar, 2021
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- 5 Mins Read
PPT
Lee utilized multiple channels to find an ideal property. His search approach included the use of online information to physical visits of the property. In other moments, he could study the newspaper on the estate sections to find middlemen acting on real estate.
From the case, one finds lee gathering information from the 2010 US Census Tract to understand the breakdowns, employment, ethnic background, and education of the population residing in Beacon Hill. The maps helped him to find distances of amenities and properties from Beacon Hills to the urban area. This data was most available from the websites like Zillow and Reakltor.com. From Banrate.com, the same sites, he could collect information about mortgage rates and on various products. The newspaper advertisements were most important in providing him with details of the brokers who could help him allocate resources on the needed property. At the same time, he was critical in comparing real estate brokers who provide him with expense and income statements to meet his needs. Lastly, he spent his evenings interacting in person with tenants and owners to become familiar with interest areas.
In the search for information, Lee considered numerous factors to ensure finding the most appropriate [property. Firstly, he considered the market for real estate in the interested region. This information included considering the demographics, location, and socioeconomic status of the surrounding community to ensure they match his desired characteristics. He also reviewed the local and city policies, including how the current and historic changes affect modeling and building a new property. Besides, he considered how his purchase decision might be affected by the conditions of the building. Therefore, he considered whether there are opportunities for increasing the rent rate from the information given on how the landlord had charged previously and agreements made with the tenants. Lee made a critical analysis on how further growth of the area would impact the real estate market. His search methods took into account multiple approaches to meet his needs.
How would you evaluate the Pinckney Street property? What are the risks and rewards?
About Lee’s priorities and limitations on investment, one can identify multiple pros and cons on Pinckney Street property. In the last ten years, the Beacon hills have been on neutral to positive growth. The expected return on cash by the Beacon Hill investors was 8% to 12%. In the US housing market, it is hard to find a return in the lower double digits.
Notable, the upsides of the area are that Lee and his wife would benefit from free rent. When amortizing the mortgage, Lee will gradually gain equity on the property. Notably, the area’s properties show high growth potential in the rental price in the long run. As the housing prices have been increasing lately, the rental price has shown a simultaneous increase on Beacon Hill. The rate of return on cash shows attributes of redevelopment in the area for higher-income investors.
Nevertheless, the area has potential risks that will affect Lee’s property decision. The Commonwealth of Massachusetts Great and the Court have limited property values by regulating heavy renovation and new buildings on Beacon Hill. Lee has an intention of managing the property to save a substantial amount but underestimates time commitment. Despite being inexperienced in the area, Lee intends to save through costly renovation himself. Making a mistake in the project could end him in substantial loss. In the end, more effects would be elemental in a poor relationship with his wife and low performance at his full-time job. The wife has worries about living among the tenants since it would influence conflicts and desire to raise the rental rate.
Lee is subjected to multiple uncertainties in his plan. Beacon Hill has shown the housing market’s potential to subdue, costing Lee hundreds of thousands of dollars. If there are no significant hurdles, the cost of renovation would be approximately $450 000. Achieving an 8% return on investment would need $450 000 to have an addition of $750. If Lee lacks additional information about the market, it would be hard to estimate whether Lee would increase the rate by that much.
How would you evaluate Lee’s search for a mortgage?
Lee had information on the gap between what is needed to purchase the property and his equity. As a result, he went for different shopping options. His search for a mortgage included finding multiple financing options. This process included asking for a new quote from various banks and checking the real estate property criteria. All along, he considered the benefits, cost, and implication of his chosen financing option.
One option considered by Lee was to assume the current rate with Matthew Thaler Plymouth Rock Bank. The banker had a recent loan allocation for 30 years at an interest rate of 4%. Each year, the bank expected a monthly contribution of $4 774 or annual repayment of $57 290. Lee had an option of accessing a loan from the bank and a six-month waiver payment on principal so that he would have to pay $20 000 for that period. More payments included $2 441 for two months on the additional security, but eventually, the amount would be returned to him. The bank was also open on all carrying costs, including the insurance, electricity, real estate taxes, and water, which would be accounted for during the construction. If Lee considered this option, he would settle with a $1 000000 loan. The bank was reluctant to increase the amount to $1,050000 since it was uncertain of Lee’s decision to increase the rental rate as he planned. The benefit of taking this option would be that Lee would not have to process new documents. Besides, the bank has a flexible repayment of the loan.
Lee had a second option from his search, which was taking a loan with Celia Bicego of the local savings bank. The bank offered him $1 050,000 at an interest rate of 3.75%. The rate would be adjustable after five years within the repayment period of 30 years. Then, he would be required to pay $58 353 per year. Lee had a chance similar to that of Plymouth Rock Bank to make a payment on the interest-only for the first six months during the construction, but there was a need for him and the wife to sign a liability note as additional protection against the bank. Lee was subjected to the responsibility of $10 500 origination fee and $ 7,500 associated with the loan closing. The cost covered personal attorney, title expenses, and insurance.