Portland Condo and Townhome Investment

If you go to Beaverton and Hillsboro areas these days, you'll see condo & townhome developments popping up literally in every corner. Even with a lot size of just over 15,000 square feet, you'll find brand new row houses all cramped together vying for a piece of the Portland real estate boom.

This is relatively good news for first time home buyers where single family homes are beginning to be priced out of reach. Condos and townhomes are good alternatives as starter homes. For under $200,000, you can easily find a 2 bedroom, 1 to 2 car garage, 1,500 SF condo or townhome, complete with designer paint palette, bonus room, and the list goes on. For that price, even with 100% financing, the monthly payment before tax and insurance would be just around $1,000 given today's low interest rate.

For investors with low equity, this spells trouble. This is particularly true for those who own 3-BR condos where the rent has been between $1,000 to $1400 depending on the area and facilities. The rental rate, literally, has priced itself out of the market. It's easy to see why people with that amount of cash would rather buy than rent. So the only chance of getting positive cashflow is to have almost 50% down in equity.

For those in the 2 to 3 bedroom range, there is a similar story. Investors will need to have a minimum of 30% to 35% equity in order to have the hope to break even.

What's more? If you're not into managing the property rental yourself, it's hard to even find a property manager out there who's willing to take on a condo or townhome project, with the exception of the Pearl District downtown where there's still a constant demand for space.

As far as Beaverton and Hillsboro is concerned, investors should definitely rethink their strategy. Despite that the long term appreciation gain is still solid, the short-term cash flow has been seriously affected.

Interest Only Loans Boost Portland Market

Three years ago, if I were to mention to my clients about interest only mortgages, ninety percent of them would laugh at me...thinking it was the most ridiculous thing to do.

Today, about 1/3 of the home loans out there are interest only. Thanks to the all time low interest rates (lowest in the last 50 years), people are borrowing left and right, paying no principal and enjoying a low monthly payment. For an average loan of, say $200,000, an interest only loan could save up to $200 a month compared to a 30-year fixed conventional loan.

Aside from our borrowing rates being at all time low, this phenonmenon is partly driven by the soaring home prices. Interest only mortgages help create home ownership and making home purchase affordable on a short term basis. The combined effect tempts renters to purchase homes quickly. As such, a surge in demand drives the housing inventory even tighter than ever. Simple economics, when demand exceeds supply, prices go up.

However, what's going to happen after the "honeymoon" period when repayment of the principal is due? Or when interest rates shoot up to the good old double digit? For those folks who have taken advantage of the interest only, no down payment option, they could be in for a shock. Most mortgage bankers would tell you to refinance after 3 to 4 years to secure the lower long term interest of a conventional mortgage. However, when a home owner purchased a house with $0 down, interest only loans, he/she is not likely to have enough equity in the home to refinance.

Traditionally, only the wealthy could afford to take the risk of interest only loans. The interest rate fluctuation isn't going to make them or break them significantly. When this type of loan become a mass product, however, there's danger ahead. We're likely to see a rise in the foreclosure market in the next 5 years if interest rates go above 8% to 9%.