Category: Rental Market
Real Estate will yield the highest returns versus alternative investments over the next 10 years, according to a recent analysis.
Real estate appears to be the safest bet as well, yielding the lowest risk of negative returns and the highest potential upside over the next 10 years when factors such as inflation are considered. The projections were made by Standard Life, an insurance and investment firm, in their influential Global Outlook report for the first quarter of 2013. Standard manages a $250 billion portfolio of investments for themselves and outside clients.
The report projected the expected inflation adjusted returns for stocks, bonds, cash and credit in the US, Europe and Asia. Real Estate investments were projected to have the lowest risk on the downside and the highest return on the upside. At worse, Standard projected that US real estate investments over the next decade would return.25%, after inflation. At best, real estate would deliver 8.75%. By comparison, stock results where projected at a low end of a -1% loss, to as high as an 8% gain. No one can predict the future, and projections with such a wide range of returns are certainly a hedge against eventually being proven wrong, but it is a good indication of how the world’s smart money players are thinking about property as the nation rebounds from a real estate crisis.
So if you believe Standard, socking some money away in real estate is probably a good idea for anyone seeking diversification and higher returns. But if you’re reading this blog, you probably already knew that.
Standard Life subtitled their section on real estate “Buy Land, They’re not Making Any More of It.” There’s no question that that last part of that statement is correct.
By Scott Taylor, Agent Mechanics
There are lots of options when it comes to purchasing a rental property, which can make choosing a property a daunting task for a novice investor. If you ask ten experts, you will get ten different responses on what type of property makes for the best investment. My ideal initial investment property is a modest-sized single-family residence in a working class neighborhood. Specifically, I like to invest in single-story, detached single-family homes with three bedrooms and two bathrooms. The backyard should be large enough for the tenant to have some friends over for a barbecue, put up a swing set, kick a ball, and let the dog run around. The neighbors’ yards should be clean but do not need to be showy. Assuming a potential investment property meets these requirements, here are a few other things I consider:
There is no doubting the real estate maxim of location, location, location. And this definitely applies to a rental property, particularly when it comes to choosing an area with good schools, near major area employers, and close to amenities. You may also want to avoid buying a rental that is on, or backs up to, a busy street. When the tenant goes into the backyard or opens their windows at night, they do not want to hear the roar of traffic.
One factor that is often overlooked by real estate investors is a property’s potential maintenance requirements. If the exterior is brick or stucco, that might require less long-term care than wood siding. If the roof is tile, or a newer asphalt shingle, those may last longer and require less maintenance than an older asphalt or wood shingle roof. Copper pipes are less likely to cause plumbing issues than are galvanized pipes.
Tenants love fresh paint, remodeled kitchens, and remodeled baths, so check out the potential competition in an area like new housing tracts, condominiums, and apartments. Newer structures have finishes that are more modern. Thus, the tile in your rental?s kitchen may be serviceable, but it is going to look old when compared to the granite in the kitchen in the competition?s rental across town. I am not suggesting that you replace your tile with granite, but if you can buy a rental property that already has more updates than less, then go for that.
A list of items you might like to have in your rental, in a perfect world, might include:
- Recreational vehicle parking
- Neutral paint colors
- Tile floors (especially since tile does not hold pet odors)
- Mirrored wardrobe doors (because they make rooms look bigger)
You are not going to find the perfect rental property. However, if I were comparing two similar priced rental properties in the same neighborhood, I would try to save some money in the long run and choose the one with more updates and newer neutral paint. The updated and painted property is going to take less of my time and money to get the property ready to rent and will rent quicker.
Whenever I invest in a new real estate market, I always consult with a good local real estate sales professional and good local professional property manager. The real estate sales professional can describe property costs, values, jobs, growth, and future gains in the market.? The property manager can tell me about potential rents, the length of time it might take to find a renter, and he or she can provide a picture of potential renters in the target area. In addition, the property manager, by virtue of working with other rental property owners, may know of a property not currently on the market that an investor may wish to sell.
I research the middle-of-the-market rent price in the area in which I intend to invest. Then, keeping that target price in mind, I search for an investment property that will rent for that middle-of-the-market price.? I want my rental property to appeal to a large cross-section of renters. What is the average rental price in your target area? Get with your local real estate sales professional and your local property manager. Find a property, a neighborhood, and a price range that will put you in the middle-of-the-market.
Your ideal property is going to meet your own needs for location, maintenance requirements, and upgrades.? But no matter where you invest, I would encourage you to try and hit the middle of that market.? That way you have the greatest access to the largest tenant pool possible.
The end to summer 2012 saw some promising signs in the housing market. CoreLogic’s database show year-over-year home prices increased 4.3% in July 2012 compared to July 2011. The month-over-month increase was also a positive sign at 1.3% from June 2012 to July 2012. These are some of the biggest percentage increases since the summer of 2006.
Home prices rise due to external factors: low inventory + investor demand.
Positive news in price increases has brought 600,000 homeowners out of negative equity in the second quarter, up to a total of 1.3million for this year. This is good news, but given the 10million+ homeowners who are still upside down, it appears that a full housing mend will remain elusive for the forseeable future.
John Burns Real Estate Consulting reports that the percentage of investor purchases in home sales have grown significantly beginning this year. Reports show that up to 30% of total sales are purchased by investors. What this tells us about the current appreciation in home prices is that the recovery is partially driven by investor demand on one side and low inventory on the other.
Rent prices are also rising rapidly, but will growth will subside.
At the other end of the housing spectrum, we’ve seen record increases in price of rents this summer. A surge of demand for rentals results in lower vacancy rates and higher rent prices. The annualized rent increase is almost 5% nationwide and over 10% in the hottest rent markets like San Francisco, Denver, Raleigh, Houston, and Boston. These high rental increases are very likely to quickly subside as newly constructed rentals enter the market.
Will more households choose affordable homeownership over rentals?
This is probably one of the most pertinent questions in the current housing market. The balance between rentership and homeownership has seen recent movements towards renter ship, but there is the lingering critique that rental demand will subside in favor of affordable homeownership. The new QE3 MBS policy by the fed will also provide liquidity and lower mortgage rates to make housing more affordable. Will further increases to affordability sway renters to buy a home? In short, the answer is No.
The aggregate shift to rentals has much more to do than a financial alternative to homeownership. For some ex homeowners, the desire to own a home has been crushed or severely subdued after the mortgage crisis and that sentiment will take more than a few years to repair. Then there are homeowners who have recently been flipped upside down and want to sell their homes and rent, but this segment is admittedly small. In conclusion, low mortgage rates and housing affordability will not drive up homeownership rates alone because a shaky labor market and pending foreclosures; renters are here to stay.