Growth or Income – Real Estate Investing – Part 12

Reblogger
Services for Real Estate Pros with Charles G. Perkins, CPA

 

I came across this series the other day and see that there is some valuable information that should be shared again.

 

Original content by Gene Riemenschneider DRE # 01492725

Growth or Income – Real Estate Investing – Part 12

This is Part 12 of my Real Estate Investing Series. You can view the first 11 Parts here:

Are you planning for your Future? Real Estate Investing – Part 1

Starting at Home! Real Estate Investing – Part 2

Maintain Your Leverage! Real Estate Investing – Part 3

Picking Your Investment Property – Real Estate Investing – Part 4

Location * Location * Location – Real Estate Investing – Part 5

Cash Flow Analysis – Real Estate Investing – Part 6 A

Cash Flow Analysis – Real Estate Investing – Part 6 B

Cash Flow Analysis – Real Estate Investing – Part 6 C

Cash Flow Analysis – Real Estate Investing – Part 6 D

Passive Losses – Real Estate Investing – Part 7

Gross Rent Multiplier – Real Estate Investing – Part 8

Capitalization Rate – Real Estate Investing – Part 9

Comparable Pricing – Real Estate Investing – Part 10

Rates of Return – Real Estate Investing – Part 11

Today I was out with an Investor Client and we were looking at 2 - 4 unit properties.  In this area most of the 2 - 4 unit properties are in older areas of town and some are even quite distressed.  There are some that are well kept, but nothing modern.  I don't think he has read this blog series yet, and he was asking me about return on the investment.  I gave him my brief thoughts on investment returns as discussed in Part 11 - Rates of Return.  I then pointed out that I thought the chance for appreciation was greater in single family homes.  Appreciation in value is a long term investment out look and does not impact day to day cash flow.  But Rate of Return would be better in the 2 -4 unit properties.

I may be wrong about this; but I shared with him my thinking.  Almost all of the multi-unit properties we looked at were set up as rentals.  You might find a few nice single family homes about with a studio or in-law unit that could be rented separately; but around here they are few and far between.  People are not buying 2 - 4 unit properties to live in themselves (and if they do they are still looking at the income potential of the properties); they are buying them to generate income.  The value of the property will be primarily driven by the rents and income it can generate.  Now of course the nicer and more desirable the property the higher rent it can demand; but if you get it too nice the renters will figure it is cheaper to buy.  The 2 -4 unit properties are designed to produce maximum income based on size and cost.

Now if you buy a single family home to rent, naturally you will be aware of what you can rent it for and the Rate of Return it will produce; but other factors will drive the cost of the single family home.  That factor is people looking to buy these homes to live in.  These people are not concerned about the income they will generate from living on the property.  They may even be willing to pay a premium price for things an investor will not; because the tenants cannot afford to pay him rent enough to cover those extras.  This is one reason as an investor when looking at single family homes you should look at marginal or fixer upper homes.  There is less of a WOW factor that will drive the price up.

Both Single Family Homes and 2 - 4 unit properties will appreciate in an up market; but I think the Single Family Home will do better as it is not bound by a need for a Rate of Return.  In an inflationary market the investor will need to maximize the rate of return to compete with other potential investments.  Why settle for an 8% rate of return on an investment property if you can get 12% in another investment?  This may even make rentals less appealing.  However, rents will also increase during times of inflation and a lift will also be given to investment properties.  

A good real estate investor should try to discern their goals in regard to the competing (or sometimes complimentary) goals of investment income and appreciation potential

Download the Latest Investor Calculator and compare some potential investment properties in your area.

THIS SERIES OF POST IS ONE OF THE MOST POPULAR I HAVE EVER WRITTEN.  BUT I WOULD REALLY LIKE SOME FEEDBACK ON SEVERAL AREAS:

  1. What other areas do you think I should go into.  I plan to hit 1031 exchanges and capital gains tax.  Any others.
  2. How is the investor calculator working?
  3. Do the numbers and figures I am putting out look accurate? How do they compare to your area of the country?  Is my rough estimate of expenses decent?  Higher/Lower?  What are you seeing in terms of percentage of value being attributed to improvements for deprecation?
  4. What Rate of Return do you want or feel is appropriate?
  5. Are you more interested in Appreciation or Rate of Return?

 

This post was supposed to be More on Rate of Return, but I got on to this topic with my client today - so on my next post  ......  Subscribe Below!  Yes do it now!

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Posted by

Charles G. Perkins, CPA

Servings Small Businesses in the Puget Sound Area

 

Cell: (206) 422-5504

Office: (206) 228-1988

email: charles@charlesperkinscpa.com

website: www.charlesperkinscpa.com

 

Charles G. Perkins, CPAI look forward to meeting your business and tax needs.  I also have many partners in business that can meet your other business needs.  These include contractors, insurance agents, investment advisers, financial planners, mortgage advisers, and many others.

Comments (2)

DEBORAH STONE
Balboa Real Estate San Diego, CA - San Diego, CA

Charles-

The single family home is often overlooked by investors. I agree, the appreciation factor is very different for SFR's than 2-4 units. I do find a portfolio of SFR's to be more labor intensive than say, 2 4-plexes. Finding good management for SFR's is always the challenge, which is why "self-management" is always best.....increases monthly cash flow. Snapping up SFR's that need some work is on my game plan to add to my portfolio.

"Bread and butter" property is always more valuable in a lower market cycle, since the average wage earner (most of the market) will be your potential tenants, and the "high end" rentals will have less demand.

Property Management is the key issue here, and will always be the determining factor in a performing real estate investment. Good management can turn around a loser, and bad management can run the best looking "spreadsheet" investment into the ground.

Oct 11, 2009 05:48 AM
Charles Perkins
Charles G. Perkins, CPA - Burien, WA

Deborah,

I would have to agree that good management is essential.  Investor that have the time and ability to maintain their own properties will benefit as well.  It is again important that they have the ability.  This is also part of knowing how to management a property.

Oct 11, 2009 02:01 PM