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Real estate is the overwhelming preferred choice by Americans as identified in a recent survey. With the Dow Jones industrial average reaching record highs, it might be expected that the stock market would be the favored choice but that wasn’t the outcome.
Analysis of the report suggests that the popularity for houses could be that they are tangible assets that you can see where your money is actually invested compared to stocks and bonds which tend to be unclear where the money is invested.
There are several distinct advantages of homes as investments over other popular alternatives.
Another advantage of rental homes is that most people are comfortable with them. It is the same type of property that they live in but used as a rental. They have a tendency to understand the key components such as value, appreciation, rent, maintenance and financing.
The Rules
The profit potential in single family homes for investment has been a consistently good long-term investment. They offer investors the opportunity of high loan-to-value mortgages at fixed interest rates for 30 years on appreciating assets, tax advantages and reasonable control that other investments don’t offer.
Last year, Warren Buffett said that if he had a way of buying a couple hundred thousand single-family homes, he would load up on them. Blackstone group L.P. (BX) has now purchased over 30,000 homes and American Homes 4 Rent (AMH) has more than 19,000 for rental purposes.
Individual investors actually have an advantage over the institutional investor but if they are not familiar with rental real estate, some basic rules could be very helpful.
1. Invest now to get more in the future. Whether it is time, effort or money, the prudent investor is willing to forego immediate gratification for something more at a later date.
2. Real estate is an IDEAL investment. IDEAL is an acronym that stands for income, depreciation, equity build-up, appreciation and leverage.
3. Invest in single family homes in predominantly owner-occupied neighborhoods at or below average price range. This strategy should involve homes that will increase in value, rent well and appeal to an owner-occupant in the future who will pay a higher price than an investor.
4. Location, location, location. The same homes in different areas will not behave the same. You can improve the condition, modify the terms or adjust the price but the location can’t be changed.
5. Understand your strategy – buy and sell, buy and hold or buy, rent and hold. These three distinct strategies involve big differences in acquisition, management and taxation.
6. Know where your profit is coming from before you invest. The four contributors to profit are cash flow, appreciation, amortization and tax savings. They don’t contribute equally or the same in all investments.
7. Profit starts with purchase. Buying the property below market value builds profit into the investment initially.
8. Risk is directly proportionate to the reward involved. An investment that has a high degree of upside also will have considerable downside possible.
9. Avoid functional obsolescence unless you have a plan before you buy. The lack of usefulness or desirability of a home that exists when you buy it will still be there when you sell it. Unless it can be cured, it will affect future profit.
10. Good property + good tenant + good management = great investment. These are three solid components for a successful investment.
11. Problems left unresolved have a tendency to get worse. It is generally cheaper in time or money to fix a problem earlier rather than later.
If you’d like more information about the opportunities in our market, contact me.
Rental homes can be the IDEAL investment in today's market because they offer a much higher rate of return than alternatives without the volatility of ups and downs in the stock market.
IDEAL serves as an acronym to identify the advantages of rental properties:
The combination of these characteristics working together makes rental real estate a very good investment for today's economy and years to come. Increased rents, high rental demand, good values and low non-owner-occupied mortgage rates contribute to positive cash flows and very favorable rates of return.
Contact me for more information about actual opportunities in our local market.
Forced Savings...Really? -
Part of the American Dream is to own a home. A home is a place to call your own; a place to raise your family and share with your friends. A home is a place to feel safe and secure. A home is a good investment?
Rarely, does one size fit everyone and the same goes for advice. The following suggestion is not right for everyone. However, for people with job security and who don't own a home; for people with good credit and enough savings for a down payment, there may never be a better time to buy a home.
Homes have had a significant price correction but in many markets, they have started to rise again. The lower prices combined with historically low interest rates make this an opportune time to buy a home if you can afford it.
One of the reasons homes are an attractive investment is that fact that you can use a small down payment and finance the balance for 30 years. The principle, called leverage, allows you to earn a return on the value of the home rather than the actual cash investment. Small appreciation can create a large rate of return on the initial investment of the down payment and closing costs.
The following example is a projection at the end of five years for a $175,000 home with 3% closing costs and a 5% interest rate for a 30 year term. The rate you see in each column is an annual rate of return based on the equity of the home at the end of the five year period due to both appreciation and amortization of the loan.
The nature of positive leverage will cause the returns to be higher with a smaller down payment. As you see in the table, the return is higher on the 3.5% down payment than with the 10% or 20% down payment.
If you're curious to see if this advice might fit your situation, you really need to sit down with a knowledgeable real estate professional who can help you assess your position. It's worth the time because there may never be a better opportunity than now.
What's keeping you from taking advantage of the low prices and mortgage rates available today? Concerned that you may need to sell in a few years and won't be able to get your equity out of your home?
Suppose a buyer purchases a home and finds out that they need to move in two years. Instead of selling the home, they could convert it to a rental. It's possible that it could have a positive cash flow even with the small down payment. In most cases, the conversion would not accelerate the mortgage.
The price of homes and low interest rates combined with a very strong rental market in most areas has attracted a lot of investors. Non-owner occupied mortgages generally require 20-30% down payment compared to a 3.5% down payment for a FHA owner occupant.
The following example looks at a home that might have been purchased as a principal residence and then converted to a rental at the end of two years. There are certainly lots of variables to consider but the high indicated rate of return merits closer examination of the possibilities.
For the buyer who has good credit and ample funds for down payment and acquisition costs, there may never be as good a time to buy a home as now. For the buyer who is concerned that they might have to move in the near future, converting it to a rental might make a great investment opportunity.
To say the investment market is unsettling is an obvious understatement. The market is down 8% in the last ten days and the news doesn't give much hope that things are going to get better in the near term.
Preservation of capital is probably today's most important investment consideration and making a profit would be a bonus. Of all the conventional investment alternatives like stocks, bonds, mutual funds, gold, commodities, CDs and annuities, housing is the best asset class in America.
Homes have had a 30% to 40% price correction in the past four years. Mortgage rates are at near all-time low rates with 30 year terms available for investors. Rents have increased significantly over the past two years while vacancy rates have decreased. People will always need a place to live.
Five year certificates of deposits earn a little over 2% but rental properties are yielding eight to ten times more than that. Income properties are tangible assets that have benefitted dramatically in inflationary times. Cash assets can be devastated by inflation and diversifying into income properties can provide real protection.
Single family homes offer investors the opportunity to borrow large loan-to-value mortgages at fixed rates for long terms on appreciating assets with tax advantages and reasonable control. Investing in rentals can provide stability, safety and a higher rate of return.
