It’s a Great Time to Buy a House…If You’re an Investor
Opportunity is Knocking! …Or Is That the Plumbing?
Last week, we went over the fact that owning your home is, on average, about twice as affordable as renting — and why. The lack of first-time buyers created by strict debt-to-income ratio laws and high down payments is creating a slowdown in the entire consumer housing market.
But the consumer housing market is hardly the only housing market — and the acceleration of investor-purchased housing is still going quite strong. The reason is obvious: it’s precisely because owning a home is twice as affordable (read: costs about half as much) as renting one. So if you can spend $30,000 as a down payment on a $150,000 home, get a mortgage for $380/month, and rent it for $760/month, you’ll have $380 left over.
Even if you get a fairly high-end property manager that charges a huge 15% of your monthly rent, that’s still $266/month in your pocket — enough to get your down payment back in just over five years and start making pure profit. That’s a capitalization rate of 10.6%; for a housing investor who started with just $30k in the bank and a middling-decent credit score, that’s a knocked-it-over-the-fences success!
But Wait, There’s More!
Not to sound like an infomercial, but there really is one more element to the equation that needs to be brought up: appreciation. The collapse of the housing market in 2008 has mostly recovered — the days of buying a home and having it be 12% more valuable by the end of the year without any effort are over. But that said, house prices are still going up in most of the country. In our area (Greater Metro-Detroit), housing prices are currently predicted by Zillow to go up by 3.6% over the course of 2015.
Furthermore, many bank-owned homes are in relatively good condition in terms of structure — the fixes they need are primarily superficial; new paint, new trim, new gutters, new yard, and so on. A cleverly-purchased home can expect to see a meaningful gain in value through appreciation alone and gain a meaningful amount of value on top of that through inexpensive but highly visible work.
What to Watch Out For
Of course, all of this is hardly to say that there aren’t massive pitfalls in the investment arena. Notice that ‘our area’ above isn’t “Detroit.” That would be virtually impossible. The area immediately around Detroit — Macomb County, Oakland County, and so on — is thriving and vibrant. Detroit itself…is a very challenging place to invest in.
One of my competitors recently shared a story in which he was interviewed by a new investor who wanted him to manage a few properties in Detroit proper. His response amounted to “You’d be better of handing your money out to people on the street.” It turned out he had purchased the property in question from other investors. Here’s a tip: if an investor is selling another investor a property, it’s because they’ve realized they can’t turn a profit from it any other way.
So even though the market right now is an excellent opportunity for a new investor, you do still have to watch your back and make sensible choices. Don’t invest in any city, town, or village where the local government has declared bankruptcy, for one thing.
In fact, that inspired an idea. How about you come back next week, and we’ll talk about the most common and catastrophic mistakes in residential real estate investing?