More About Real Estate Investing

5 Responses to “More About Real Estate Investing”

1. 1
   Jose Anes Says:
   May 31st, 2005 at 8:10 am

   In most areas of the country Real Estate investing, with the intent of renting it out to other people, is a difficult market.

   Many appartment complexes are even converting into condominium complexes in the area where I live.

   Why? Because rents are very low (low demand for rentals), and property prices are very high (high demand for purchasing a property).

   Rental income doesn’t matches or goes above the mortgage, insurance, maintenance, and administrative expenses.

   The rental market will improve when things balance out… some day.

   For now, buy a great condominium (or other property) that you like. Live it for a few years, and when you move into the next one, keep the old one for renting. At that time, rental income may match what you pay on the property.

2. 2
   nickel Says:
   May 31st, 2005 at 10:34 am

   Thanks for your feedback. I agree that the best way of pulling this off would be to live in the place for a few years first, as that would give rent a chance to grow relative to your mortgage payment. One other way of looking at this is that, if you can afford to break even or perhaps operate at a small loss, this would be a good way to build equity in a (hopefully) appreciating property. You could then flip it in the future. Here, however, you have to factor in the transaction costs (closing, realtors, etc). I guess the bottom line is that if this was easy and highly profitable, everyone would be doing it.

3. 3
   Sadi Says:
   June 3rd, 2005 at 8:29 am

   Actually, I think this Investment Property calculator is much better than Kiplinger’s.

   University of Maryland REI Calculator.

4. 4
   Jason Says:
   November 25th, 2005 at 3:37 am

   I’m a real estate investor–sort of. I bought my first house at 23 and lived there for a few years until I got married and ‘moved up’. We decided to keep the first house and rent it out, but specifically took out a home equity loan on the appreciation first, to use as a down payment on the newer home. To an extent, this is bad because it means I didn’t put anything substantial down on the new home. But on the up-side. it cost us almost nothing to acquire a nice property, and left us owning another one that we could rent out for profit!

   The harsh reality is, owning a house is a lot of work and expense. Repairs are not cheap. New A/C units, new roofs, new paint inside when tenants leave, and occasionally outsize repainting (or re-siding as we did this year) can eat an entire year’s worth of gains in one bad month. So far, we’ve rented it out for 5 years and lost somewhere around $2000 over the same period. That’s not a bad house, either, and in a good area.

   The three things you must be careful of when buying a property (besides location, location, location.. I mean three more things) is property taxes, home owners association fees, and management fees. In states with low or no income tax, you tend to have higher property taxes, and cities vary within them. High property taxes tend to depress the appreciation of housing, because the more it costs, the more you get to pay the local government, and people don’t like that! Two examples: Texas has moderately high taxes (in some areas) and low appreciation. California has very low property taxes, and outrageous appreciation. If people had to pay 5% per annum of their value in taxes, nobody would be able to buy in California at these prices. The HOA fees are never-ending… just additional tax that you are never free of. After you hypothetically pay off a property, you still pay taxes, insurance, and HOA fees, so you can calculate the eventual take after the mortgage drops out of the equation. Lastly, management fees. If you do it yourself, it can save you quite a lot, but is a bit more hassel when tenants leave (common) or don’t pay (not too common, from personal experience).

   Ultimately, I haven’t bought again in Texas because the margins are so small. Almost bought a couple of condos, but the HOA fees brought me right back to net $0/mo, not counting repairs. Ouch. In California, the margins are better, but the capital required to buy an apartment building is unbelievable, and the laws are definitely against the owner in any kind of tenant dispute or eviction proceedings. Most other states are experiencing huge disparity between purchase price and rental costs, so it’s really not the best time to buy.

   That said, foreclosures are a decent place to look for deals. Moreso now than ever before, since so many people are waaaay over leveraged into real estate, the monthly losses can add up and force people to sell or lose their property. Several real estate sites have predicted a huge boom of foreclosures as the market sours and banks start ratcheting up the mortage requirements, which in turn puts flippers out of business and investors lose the ability to get out from under bad properties. A huge wave of foreclosures may be set to hit the market in the next few years, leaving more conservative buyers in the catbird seat. At least, that’s what I’m telling myself.

5. 5
   nickel Says:
   November 25th, 2005 at 8:30 am

   Wow, what an informative comment. Thanks Jason!