Friday, May 31, 2013

Is Now the Time to Invest in Rental Property?

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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