Saturday, July 9, 2011

Some Thoughts on Real Estate Investing

There are some good opportunities out there for people looking to invest in real estate.  Of course, this isn't for everyone and you should definitely consider some factors when deciding.  For example, if you have a career in which you are likely to move around, then real estate investing is probably not a great idea.  It can be difficult to manage property when you live far away.  You can hire a management company, but this may eat into your potential returns.

I also wouldn't recommend real estate investing to someone with little or no money in the bank (or other liquid assets).  Problems can arise.  You may have repairs or you may have a time period between renters where you are not collecting any rent.  You need a little cushion to get through these times.

For people with significant savings who are not planning to move out of their current city, then there really are some great opportunities for a good return on your money.  I would not recommend investing in real estate if you live in a big city that is really expensive (like New York).  I also wouldn't recommend investing where prices are so depressed that it makes you wonder if the city will ever recover (like Detroit).

So if you live in a good place to invest in real estate and it seems like something you want to do, start doing your research on the internet.  The internet has made it so much easier for the average guy.  You may still benefit from getting a real estate agent, but at least you can look and narrow things down on what you want to seriously look at.

One thing you should seriously consider is paying cash (not literally) for an inexpensive place.  While I would more typically recommend buying a 3 bedroom 2 bathroom house as a rental property, you may live in an area where condos are depressed in price.  If you can pick up a small condo for, say, $50,000, it might give you a good return on your money.

Now I understand there are arguments against paying cash.  Libertarians usually understand the nature of inflation and there is a legitimate argument that you should take out a mortgage and pay it back in depreciating dollars.  But, also consider that if there is high inflation, owning a rental property will still have its advantages without having a mortgage.  You may get appreciation in nominal terms on the property.  In addition, you can raise rents as they tend to go up with inflation, at least over time.

Let's run some numbers for an example.  Let's say you have been saving your money for a while.  You have $50,000 available.  You buy a one or two bedroom condo for $50,000.  By paying cash, this may enable you to get a better deal.  You can offer the seller to close within a week.  You may get a better price because of this.

Now let's say that property taxes will be $100 per month (the purchase price is only $50,000).  Let's say that association fees are $175 per month.  Let's say that insurance is another $25 per month.  Let's say that you can rent it out for $800 per month.  On a normal month where you have it rented and don't have any extra expenses, you will net about $500.  On $50,000, this is an annual return of 12%.  Someone please tell me where I can get a 12% return, on an almost continuous basis.

Another advantage of paying cash is that you don't have a mortgage and therefore have less risk.  In the above scenario, even if you go for a month without renting it, it will only cost you $300.

Perhaps my numbers are too optimistic for where you live.  Either way, I spelled it out to make a point that real estate investing is something to consider right now with all of the bargains out there.  You can take your time and shop around for the right deal.  If you live in a good area and you are in the right financial situation, this might be something to consider.

1 comment:

carina said...

Why to invest in land is the question and the answer is that land has a fixed value. Real estate investing in land is sounder since land has a fixed value that does fluctuate but the price guaranteed to appreciate with time.