There are a lot of folks who feel that the best possible investment right now is single family rental property. Not only are individuals pursuing low cost homes to own and rent out for income, but there are a fair number of corporations doing likewise. The corporations are buying where the prices are most depressed, and where the upside opportunities seem greatest over the longer term. Investment buyers have probably contributed significantly to the recent home price increases and lower overall inventory.
When compared to other investments, is real estate really that good? It's hard to say because, like buying cars, buyers of investment real estate often believe that they have the "secret sauce" that makes them and their purchases way above the curve, and that they can make much more than the average return, whatever that is. Certainly, if you include all the midnight warriors who learned everything they know about investment real estate on late night infomercials, it's easy for a prudent investor to beat the averages. But, is real estate the best way to invest, or even a good way?
Everyone who buys a new car or a piece of real estate feels that they got a great deal. Actually, market forces do a fair job of leveling the field to the point that everyone gets about the same deal. So, with what I believe to be the acquisition optimization myth set aside, I think it's safe to assume that everyone pays relatively the same amount for like value cars and real estate, almost everyone pays market value. If that's a valid assumption, then it should follow that just about everyone with equal skill and execution gets about the same return on their investments.
My quick and general calculations tell me that the best annual return is going to be about 8%. If you can get monthly rent equal to one percent of the acquisition price of the property, and if taxes, insurance, and maintenance can be kept down to 3.5% of the acquisition cost annually, and if vacancies are only one month in each two years, you can book around 8% on your investment dollars. Certainly, leverage and tax losses can help increase the yield, but that is true for other investments also. Compared to some equities like REIT's, MLP's, and BDC's, the yield on them is comparable with more liquidity and no physical labor needed.
Perhaps it comes down to the comfort factor. If an investor enjoys lots of hands on maintenance of property and tenants, if an investor feels good about looking at where the money went, if an investor has attained the level of knowledge needed to carry on the active business of owning rental property, it could be an adequate fit. For others, my advice is to consider alternative investments.
Comments (8)Subscribe to CommentsComment