March 15, 2008: Your rental home in Phoenix will generate positive cash flow -- but will it appreciate significantly in the coming years?
It's still a buyer's market out there, but is it an investor's market? The answer to that turns on three other issues: Vacancies, values and cash flows.
Lenders get all the blame for the downturn in home values, but that's not entirely fair. Another big share of the blame goes to the builders, who built new homes far beyond any reasonable estimate of demand. So, even though folks who might have gotten home loans two or three years ago are stuck renting for a while longer, is there enough tenant demand to keep a rental home profitably occupied?
Even if there is, will the prices of Valley homes continue their decline? This seems likely, at least in the near term. There is still a tremendous amount of inventory in the MLS system. The best bargains, though, are houses that are in the foreclosure process. These can be hard to wrest away from lenders, but they may be a leading indicator of the bottom of the market.
More significantly, will a rental purchased at a bargain price throw off positive cash flow? Unequivocally: Yes. To qualify for an investor loan, you will need to have great credit and a 20% down payment. But interest rates are still very low, and rents have held up just fine through the downturn.
So the big bet boils down to this one question: If you buy a rental home in the Phoenix market now, will you be able to sell it at a significant profit eight or ten years from now?
Alas, no one can predict the future. If you pick the right rental home -- good house, good location, good orientation, easy access to schools, playgrounds, shopping, freeways and jobs -- it should rent well now and resell well later. If you get the right loan and don't refinance, your income property will actually produce income -- which means it will pay for itself and still throw off a few bucks a day in cash profits.
But will it appreciate in the forthcoming years? For the answer to that question, we'll just have to wait and see.
Greg Swann is the designated broker for BloodhoundRealty.com, a full-service Metropolitan Phoenix real estate brokerage. This article originally appeared in the West Valley regional sections of the Arizona Republic.
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