Leverage 101: How to use it to your advantage in an ever-changing real estate market on Hilton Head Island and BlufftonRead Now
Leverage (lev-er-age) verb : using borrowed capital for (an investment), expecting the profits made to be greater than the interest payable.
We are into the new year by only 7 weeks and already seeing near record sales numbers for Hilton Head Island real estate and Bluffton real estate. For those that have been following and reading my articles for the past 8 years you know that I have been preaching the virtues of buying since the market fell out in 2008. Some of the greatest fortunes throughout modern history have been made by anticipating what was coming and those with the ability to do so are the ones that gain the most. For the best example of this I direct you to Sir John Templeton and how he went from literally nothing to billionaire. Some call him an opportunist but what he really had was the ability to anticipate what the future held. He ended up using his wealth to do good by creating the Templeton Prize which some view as bigger than the Nobel Prize.
Some of the reasons cited for the increase in sales of real estate on Hilton Head Island and Bluffton is the positive outlook on the future of the market, the ability to anticipate what is coming and the desire to live a lifestyle people have worked their entire life for. The outlook for the future appears to be clear to those that have been buying property; i.e. they are anticipating something and in the opinion of this author that anticipation is utilizing leverage to their advantage so they can start enjoying the life they have always dreamed of.
With the financial crisis of 2008 markets crashed and one of the reactions by the Fed was to lower interest rates. Rates have been kept relatively low since (whether you believe that has been artificial or not is beyond the scope of this article) and overwhelmingly to the benefit of the real estate market, even if many have not yet taken advantage. Because you cannot artificially keep interest rates down forever, they have been slowly moving up for a number of years. Where we once enjoyed interest rates in the 3% range we are now seeing rates in the 4%+ range. Suffice it to say, interest rates are NOT going lower anytime soon and are only headed in one direction. To illustrate how this effects todays buyers let me give you a common scenario.
Assume you have been considering buying but for whatever reason have decided to wait. While waiting the Hilton Head Island and Bluffton markets have seen steady increases in sales, prices and a reduction of inventory. Simple laws of ‘Supply & Demand’ tell us what happens in this instance; increasing sales + lower inventory = higher prices. Simultaneously, interest rates have also steadily increased. The property you were looking at last year at ‘X’ price has now increased to ‘Y’ and with higher interest rates your buying power has decreased by more than just the price of the property. The increased interest rate has also increased the overall cost to you. Let’s take three different price points and their differences in interest rates to compare:
Purchase Price 3% rate (mo. payment) 4% rate (mo. payment)
$300,000 $ 1,012 $ 1,150
$600,000 $ 2,100 $ 2,360
$1,200,000 $ 3,650 $ 4,130
*This scenario is based on certain assumptions and used for illustration purposes. It is not to be construed as actual numbers for everyone looking to buy
**These numbers were calculated utilizing a credit score rating of 740+ and a minimum of 20% down payment. Loan amounts more than $424,100 are considered jumbo loans in South Carolina and have different parameters for down payments and rate based on sales price. In the scenario above it was a ¼ % higher rate.
***Monthly payment includes principle and interest only
As you can see the increase of 1% in interest rate can cause a difference in your monthly payment and decrease your purchase power. This doesn’t include the increase in sales prices overall for the area! If we have a mere 3% increase in prices of property of those mentioned above they would be $309,000, $618,000, and $1,248,000 respectively. (NOTE: the average sales price of real estate in many parts of Hilton Head Island and Bluffton has exceeded 3% annually for the past 3-5 years and in many communities, has averaged a 6%-8% sales price increase per year) Not only would the purchase price go up but so do other costs because the amount being borrowed is now greater; financing 80% of $309,000 is more than 80% of $300,000.
There are times when patience is a virtue and waiting is the correct thing to do. However, the past 8 years has not been one of those times as it relates to purchasing real estate in the Hilton Head Island and Bluffton areas. The lone exception would be if you could not find the property you wanted and waited, albeit a short period, for a property of your choosing to come onto the market. However, rationalizing and talking yourself out of purchasing now only increases the cost later and as illustrated, lowers your purchasing power. That dream condo, lot or home you have been dreaming about for years that you passed on is now that much more expensive and going up as time goes on. The crazy thing is that is not the worst part. What’s worse is you have put living the Island and Low country lifestyle, the one you have been working so hard for, on hold. We may see another downturn in the market in the future as it ebbs and flows, but with the current growth being steady, as opposed to large jumps, I don’t foresee a downturn happening for quite some time around Hilton Head Island or Bluffton. With that, the longer you wait the greater the cost to you.
I have been advocating taking advantage of a buyers’ market and low interest rates for almost a decade. We are now in one of the rare times of a market where it is advantageous for buyer’s and seller’s alike. Opportunities like this do not come around very often and if you procrastinate too long, you’re going to miss out on a great opportunity. One that allows you to use leverage to your advantage. If you don’t believe me, just ask the many property owners in the area, or those I have worked with, if they ever regret their decision to purchase and I’m quite certain what the answer will be. If you’re still not sure, call me and I will tell you.
QUESTION OF THE DAY: Do you agree/disagree that using leverage to your advantage is the thing to do in today's real estate market on Hilton Head Island and/or Bluffton? Did you enjoy the article above? Please let us know your thoughts in the 'Comments' below, on the PNP Facebook page or on Twitter @PNPRE
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