Wednesday, June 11, 2008

Oklahoma is OK - Buy Now?

I recently posted commentary questioning if now was the time to buy additional rental properties. There are fewer people entering the landlord business now then was the case three years ago. Many people who were buying three years ago were buying because it was "fashionable". It was easy and cheap to get entry. It is now less fashionable then it was three years ago; there have been some changes while other things have remained the same. Let's discuss:

What has stayed the same?

  • Prices in Oklahoma and Texas have been fairly flat
  • This means the cost of entry is still close to the same as it was three years ago
  • The cost of money (interest rates) is about the same is it was three years ago
  • This means your monthly costs are about the same as three years ago
  • People keep moving into Dallas, Austin, Oklahoma City and Tulsa
  • This means there is a need for more housing

What is different?

  • You must have stronger qualification and bigger down payments to buy an investment property - no more "liar loans" or no money down loans - you have to bring something to the table!
  • This means fewer people are buying rent houses
  • This means, as a landlord, you have less competition
  • More people are renting as opposed to buying
  • This means you have less tenant turnover and lower vacancy, meaning lower costs
  • The major builders have "dialed down" construction
  • If people keep moving in there may be a shortage of available housing
  • Rents are already creeping up!
  • This means you have better income
  • If you offer a nice product you can be more demanding on your tenants
  • This means you get a better return when you have a better product

So, why are fewer people entering the market now than were entering three years ago? You got me - it doesn't make sense.

I am anxious to buy now. I expect raw material and building costs will rise in the near future. In Texas and Oklahoma this increase will drive up the costs and value of homes in our market. 80-90% of the cost of a home in our markets is the actual structure (the balance is the cost of the land), so when it costs more to build in the future the prices of homes will rise. Buy now to avoid future increases, but it also means you will take advantage of the appreciation. Conversely in most of California, only 20-30% of the cost of a home is the structure so when the construction costs rise you may see a corresponding drop in the land value leaving the overall cost of a home about the same meaning no appreciation or even negative appreciation. Land in Texas and Oklahoma is "dirt cheap" this keeps a "floor" on the prices and it also means the whole real estate business is much less speculative.

Based on this it makes sense to buy now, what do you think?

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