How to Assess Real Estate
This seems to be a recurring topic. I know of no other investment that allows you to pay off the amount owed on that investment, increase the monies received monthly, and still have the investment plus appreciation left over. No, it is not super liquid but price moves the market. If you have to sell, you can decrease your price and sell quicker than if the price is high. However, you do have to hold your investment for some time prior to this. You will have difficulty “flipping” your investment in a short period of time so you must assess it well.
Investing Is Scary
Definitely not for the faint of heart. However, if it was easy everyone would be doing it and there would be no market for your real estate. You must have the right mindset. This investing is just for the cash flow. And we all can use additional cash flow.
You can not count on the appreciation of your home. It usually happens but there are so many variables. What if?? You can not count on rents going up. They usually do but what if they do not? You still have to sleep at night.
Check out the post: Real Estate, Problem or Promise. You can not tell if this is really good or bad for you. It is not for everyone but you might be the one that really profits.
Choose your property carefully check real estate websites like Zillow for home prices & rents. You are not looking to increase the value of the home. When you assess the property, you must always think that you will sell. The idea is to get a home where the rents will remain high or in need. You want to make your money on the rents, but making it on appreciation is just as much fun. If the repairs are too expensive, it will be time to sell and move on.
You should still have the original investment so you can do it again. However, I can not stress enough that you need to run all the numbers for your investment and figure out all contingencies before you invest. Otherwise, something unexpected may come up. You can count on the unexpected coming up anyway. You just need to be financially able to take care of all possibilities.
Inflation, Inflation, Inflation
This is a problem most of the time but for real estate investors, it is a plus. Have you ever know properties to go down in price? It can and does happen. That is why you must be prepared to carefully assess the market and specifically the property.
Inflation can and will eat up savings. With inflation, the same amount of money tomorrow is worth less than it is today. Have you checked out the price of produce at the grocery store or the cost of medications? Does it ever stop going up? Pay no attention to what the government says. Since you eat and shop, you know the truth.
Many seniors have some money saved but are having to take hard-earned cash from their savings every month for expenses. It is not much but we know that eventually there will be no money left to take.
The interest rate is low right now. So if you worked hard during your lifetime and had counted on the interest from the money you had put away to help with your daily expenses, well, we all guessed wrong.
It is doubtful that we will see the interest rate rise during our lifetime for several reasons. The main one is that the government cannot afford to let rates rise. The government owed so much interest on the debt in 2018 that it consumed a minimum of 6.8% of the federal budget. Today that figure has risen dramatically. If the interest rate rises, so will the interest the federal government must pay. Consequently, the government will do everything they can to keep rates low.
The Fed continues to hold its benchmark interest rate at a level intended to stimulate economic growth by encouraging borrowing and taking risks. It sits in a range from 0.5 percent to 0.75 percent. However, if inflation raises its ugly head, the solution is to slow the economy down by raising rates. The reverse is also true, if the economy is not growing enough, a solution is to lower interest rates to encourage borrowing. Since rates have been so low for so long, there is simply no way to lower the rates much more.
Simply put, the government is between a rock and a hard place.
Make More Money With Less
Now we must figure a way to get more money from what we have. Investing in real estate is one way but it is not for everyone. There are two reasons to invest.
Your real estate may be worth more tomorrow than it is today and when you sell it, hopefully, you will reap the benefits. Maybe and maybe not.
The value does not always go up. If you did your homework as well as are lucky and purchased the right real estate at the right time and price, and if you can sell it when you need to, then the answer is yes.
Rents usually go up. Think about how much you paid for rent 10, 15, or 20 years ago. How much is the same house renting for today?
If you can purchase a home that will bring in rents of say $2,000 a month you may think that you are making a lot of money. However, you are not making as much money as you think you are. You have to consider the payment as well as taxes and insurance. Then there are other fees that may be associated with the home. This includes repairs and vacancies.
Assume the house costs $300,000 and will rent for $2,000 per month. It is rare that you have $300,000 sitting around just to invest in a home. But for demonstration purposes let’s assume you have $200,000. So now you figure you have to borrow $100,000.
If you borrow $100,000 for 30 years at 3.6% your payments are $450 a month for principal and interest. Assume taxes are $4,500 a year and insurance is $1200 a year. This affects your net profit. If you rent for the $2,000 per month, you have to decrease your rental cash flow by that payment of $450 a month, plus $375 per month for taxes, and $100 for insurance. Now you have a cash flow of $1075 monthly.
But we know there will be repairs and vacancies. Let’s assume 10% of rent or $200 a month for repairs and another 10% of rent or $200 a month for vacancies. Now your net income per month is $675 per month on your $200,000 investment. That comes to an annual rate of return of 4.05%. That is a good interest rate!
Other Factors To Assess
Before jumping in, there are other considerations.
- 1. Is it a good rental market
- 2. Will the area remain a good rental market
- 3. Is the house in good condition
- 4. What is the timeline before the house requires repairs
- 5. Is the location of the house desirable
- 6. How far is the house from your location
All other things being equal it may be a good purchase. Assess the asset carefully and make a good decision but remember, not making a decision is the same as making a decision. Everyone makes mistakes. You have to have the staying power in case this purchase is not the right one. Just do your homework and make the best decision you can. Long term, real estate is a great investment.