Is now the time to buy investment homes? I hear this question asked
over and over again. When an individual looks to buy a single family
home as an investment, one of the biggest considerations is cash flow
and whether the free cash is sufficient to cover operating expenses of
the investment.
One of the primary reasons people look
to invest in a single family home is that for a relatively small initial
investment, you can take advantage of real estate as an investment
opportunity without the overhead of paying an investment fund or paying
REIT expenses. In addition to the low cost of entry, you can often
leverage low interest rates to multiply the benefit realized at
divestiture. When someone asks, "Is now the right time?" they are
usually asking if 1) is there upside potential and higher than average
returns and 2) can I make this investment without having to pour
additional resources (money and/or time) into the investment.
The
question of upside potential is very market dependent and
micro-specific to each individual piece of real estate. When working
with a ONEprop Sourcing Specialist you have someone who is looking for properties at or below market price and
which have specific attributes allowing the best opportunity for a
strong upside. They are also looking for a property which has lower
cost of ownership in its role as an income producing asset. There are
many variables which contribute to lower cost including (but not limited
to) location, layout, materials and whether it is in a highly desirable
rental area with strong demand from low-impact tenants.
The
second question is whether you can make this investment without having
to pour additional resources in to the investment. This is a simple
money equation. If you are financing the home, you need to provide
enough of a down payment so the normal costs (Loan payment, Taxes,
Insurance, HOA Dues and Management Fees) will yield a positive cash flow
of $100-$200/month. The $100-$200/month will be used to fund normal
repairs. If you follow this equation, you should be shielded from
everything except an extraordinary expense. Your job as the investor is
to sit back, let the management company take care of the home and let
the tenant pay down your note while appreciation provides additional
returns.
Any time can be "the right time" to buy an
investment property as long as you consider these questions. Currently,
there are fewer quality opportunities available than over the past few
years. It is more challenging to buy the right home in markets where we
have seen greater price appreciation. In a few specific markets, price
appreciation has limited the ability to have adequate free cash flow
unless you provide a 30-40% down payment. A 30-40% down payment may not
be the best use of your cash, but if you believe in these markets it
might be the right strategy. We see this issue in the Phoenix market
where sales prices have gone up while rents have gone down. In Austin
rents have gone up, but sales prices have gone up faster. Both these
markets require more work to find a quality home with strong cash flow.
All the rest of our markets have easier to find opportunities - my
favorites, in order, are Oklahoma City, Tulsa, San Antonio, Charlotte,
Dallas/Fort Worth, Atlanta, Lafayette and Baton Rouge.
A
last note, this information is very time sensitive. The dynamics of
each market are changing very fast and this insight could be different
in thirty days.
Reach out if you have additional questions. My email address is KMartin@ONEprop.com.
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