Tuesday, May 24, 2011

Why invest in Real Estate?

The other day Zillow came out with a report that showed another large drop in housing prices.  This particular report showed an 8.2% drop in housing prices nationwide year over year, certainly demonstrating for many people that real estate is a terrible investment right now.  I, myself, have talked to multiple people who think real estate might be a good investment in the future but, with the expectation that housing prices will drop further, they want to wait until prices pick up.

I believe those who are waiting on the sidelines are wrong to do so.  Price declines are scary for sure but, as Warren Buffet said, "I'm fearful when others are greedy and greedy when others are fearful".  Price declines have corrected to the point where they are below most rational measures of value.  In many places, including my town  of Phoenix, Arizona, properties are so cheap that it would be more expensive to dump all building material on dirt than to buy an existing house.  Sure, prices could drop a little further but it is highly unlikely that they will drop substantially more than they already have.  Anyone remember back in early March 2009?  The same thing was happening to the stock market, I remember reading about and hearing so much negativity about stocks and how stock market investing was no longer a good investment.  Remember how that story ended?  Stocks have almost doubled from their March 2009 lows and the most beaten up stocks -  the banks, are up anywhere from 2-6 times what they were trading for in early 2009.

Of course, just because the stock market came roaring back after a protracted drop doesn't mean that housing will follow the exact same pattern.  Obviously, there are differences in the two asset classes and, like stocks which have seen largely diverging returns based on the individual company, real estate will recover unevenly based on geographic and specific location as well as asset type.  However, as I will show in a few examples real estate is a fantastic investment right now even if no appreciation to the asset is expected.  Add in some appreciation and you have an investment capable of producing annual returns of 30% for the life of the asset!

How could this be you ask?  Consider a property I am currently getting ready to sell in Surprise, AZ.  Selling price of this property is $110,000, with all closing costs paid by the seller.  Current market rents for comparable properties (4B/2B, ~2,000 square feet) are $1,100 - $1,200.  (It rented a little over a year ago for $1,050 and rents have gone up since then).  Additional expense assumptions are as follows:

Maintenance allowance: $100/month ($1,200 per year)
Vacancy allowance: 1 month vacant per year
Taxes, Insurance, HOA, marketing: $1,800 per year

Annual return on investment in this case is 8.3% (will be less if property management services are needed - property management typically charges 10% of rent collected)

Not a bad investment for someone looking for regular cash payments for retirement or supplemental income purposes.  And much better economics and upside than purchasing an annuity, CD or bond.

Now, lets look at the return if this investment were to be financed.  Assumptions:

Purchase price: $110,000
Assumed rent: $1,150
Down payment: 20% = $22,000
Interest Rate: 5%
Term of Loan: 30 Years
Mortgage Payment: $472/month

Maintenance allowance: $100/month ($1,200 per year)
Vacancy allowance: 1 month vacant per year
Taxes, Insurance, HOA, marketing: $1,800 per year

First year return on investment (cash return only - no equity) = 18.6%
First year return on investment (considering equity paydown) = 24.5%
First year return on investment (with equity and with 3% appreciation of house) = 39.5%

*These returns don't even take into account the tax benefits of mortgage interest that you would be able to take advantage of.

A quick plug:


As this example shows the investment opportunity is incredible.  If interested in this property give my office a call at 480 532-7999.  We should also have pictures up soon on our website www.betterinvestingre.com.

We are very interested in the long term success of our clients which is why we offer 3 years FREE professional property management for any property purchased through us.

End of quick plug

The amazing thing is that although this property is indeed a fantastic deal, we are finding amazing investments throughout the valley with similar returns.  It looks like Warren Buffet might have been onto something after all.

8 comments:

  1. I think it is hard to poke holes into an argument of a return somewhere in the neighborhood of 18-40%. I wonder with returns like this why aren't more people jumping feet first into real estate again? I guess most of it has to do with the fact that humans by nature are emotional creatures and because of this we tend to do most things based on "feeling" rather than thought.

    My personal feeling is that it is still scary to invest and I want to see an uptick before I put my money on the line, but by then I will be last in line behind others who get the biggest piece of the pie. I guess this is why investors tend to buy high and sell low - we wait for proven success before we invest but by then it is too late. Warren Buffet seems to be immune to this, so I guess if he says it's a go, then I'm for it as well!

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  2. Interesting, & incredible numbers. I'm wondering if there is any way I can take advantage of this with say maybe 5% down. I don't have that big of a chunk of money to put down right now, but I'd like to invest in real estate.

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  3. I still believe that investing in real estate is a good Idea, Iknow prices could drop a little further but it is highly unlikely that they will drop substantially more than they already have.Invest In Real Estate

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  4. nice blog with some nice information thanks for the postphoenix property management

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  5. I have been looking the World Wide Web for this information On Phoenix Property Management and I want to thank you for this post. It’s not easy to find such perfectly written information on this topic. Great Work!

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  6. Great article Lot's of information to Read...Great Man Keep Posting and update to People..Thanks How Do I Sell My House?

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