Jason Hartman profiles 30 investment markets nationwide. What does the future hold? The unique characteristic of our market forecast is that we go beyond the traditional method of forecasting appreciation only to profile the income property return on investment for each market area.
There are three basic components to return on investment with income properties. The first is value appreciation. The second element is leverage, since most real estate assets are purchased with financing. The third element is cash flow, which represents the impact of rent revenue, management fees, taxes, insurance, maintenance, and other costs associated with owning and renting an income property. One of the key inputs into our return on investment model is the mortgage payment. Since income properties are not owner occupied, they typically involve higher interest rates than traditional mortgages. Our models assume a 6.6% interest rate in 2011 to build the return on investment estimates.
Other key elements in the return on investment model is the closing costs, leverage ratio, and rent to value ratio. For most markets, our model assumes a 20% down payment and 4% of the purchase price in closing costs. By profiling each market from the standpoint of its health for investors, we are seeking to provide insight that exceeds that of traditional reports from mainstream media publications. When evaluating income properties in a given area, it is important to understand that each market contains sub-markets that exhibit unique characteristics that can impact the return on investment for an individual deal.
Our forecasts are intended to be overall estimates that are representative of an overall market segment, but will not necessarily represent every opportunity available.
Case-Schiller Market Predictions
The first twenty market predictions will center on the component markets Case-Schiller Composite 20 index. This represents the top 20 statistical metropolitan areas in the United States. One of the primary factors that many of these markets share in common is a generally high rate of taxation and regulation. The reason for this is because regulation and taxation both tend to be the most intense in densely populated areas. In addition to this, the valuation bubble that collapsed in 2008 drove up many of the top 20 metropolitan markets. The net result is a value contraction that is continuing into 2011 for many of the major market areas. Each market area has been evaluated for both its revised 2010 and forecast 2011 value appreciation plus estimated return on investment for people who purchase an average property at the beginning of the year.
