With any investment, there are several factors that drive decision making, but when it comes to buying real estate, taking a holistic approach—with current economic conditions at the forefront of the decision-making process—is critical. Consider current market conditions, cash flow, and the benefits of ownership to form an educated decision.
How Is It the Right Time?
With stock market volatility, investor reaction to asset allocation varies. While some investors take this time to “ride it out,” other, potentially more conservative, investors are driven to act. Insert the potential to purchase a rental property. A rental property is a tangible asset with values that are usually less volatile than equity markets, including other benefits.
As financial experts forecast a possible recession, interest rates are at a 50-year low. With lower principal payments, buying power increases. Add to this steady monthly rents, and the possibility for greater cash flow is created.
How to Maximize Cash Flow
For a relatively small initial investment, you can take advantage of real estate as an asset class without the overhead of paying an investment fund or paying real estate investment trust (REIT) expenses. Once you pick the right property, determining how to maximize cash flow is the next critical exercise. Here’s an easy, two-step process:
STEP 1: Provide enough of a down payment so that the carrying costs (principal loan payment, taxes, insurance, HOA dues, and management fees), coupled with expected rent, yield a positive cash flow.
- Cash flow can be toggled up or down depending on the size of the down payment.
STEP 2: Set aside enough funds for the occasional minor or standard repairs. A typical property should expect annual repair costs to be at or below half of one percent of the value of the property.
- For example, a $185,000 home is calculated this way: 185,000 x .005% = $925 in estimated annual repair costs.
Investing in a single-family rental includes several other ownership benefits that accompany cash flow.
INCREASED LOAN EQUITY
With every rent payment collected, your tenant is buying your principal loan balance down and increasing your equity position in the asset. Over the last several years, residential real estate has been the beneficiary of a strong U.S. economy. Homeowners and rental property investors across the country have experienced steep home price appreciation, leading many to “sell high.” However, with the threat of a recession looming, average days on market rising, and home prices dropping, it’s an ideal time to “buy low.” With leveraged money at historic lows, real estate investors have the upper hand in sales negotiations. Investors buying now can expect to enjoy steady home price appreciation as the economy rebounds.
Real estate investors benefit from tax incentives, as well. These tax benefits come in the form of write-offs, benefits tied to holding a mortgage, and even IRS classification of your rental, depending on its usage.
Work With the Experts
It’s important to consult a CPA or other qualified tax advisor to better understand tax benefit now and in the long run. In addition, a real estate broker who practices single-family property management will help clarify all the fees and expectations associated with hiring a professional manager. Hiring a property manager as your partner will be one of the most important decisions you make—not all are created equal. That’s why the team at RHOME is committed to helping landlords across the country through transparency, communication, and the most up-to-date technology.
The dynamics of individual real estate markets are very fluid and some of these insights will vary from time to time. As long as you consider these factors, anytime can be “the right time” to buy an investment property.
About the AuthorMore Content by Charles Riska