Growth or Income – Real Estate Investing – Part 12
I came across this series the other day and see that there is some valuable information that should be shared again.
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:
- What other areas do you think I should go into. I plan to hit 1031 exchanges and capital gains tax. Any others.
- How is the investor calculator working?
- 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?
- What Rate of Return do you want or feel is appropriate?
- 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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