This is my column for this week from the Arizona Republic (permanent link):
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.
Technorati Tags: arizona, arizona real estate, investment, phoenix, phoenix real estate, real estate, real estate marketing
Mike Farmer says:
Great minds think alike, I sent in my article to Bigger Pocket on a similar subject.
Thanks.
March 18, 2008 — 7:04 am
Thomas Johnson says:
Dividend yield vs capital gain.
I see 2 opportunites in the markets right now: rental real estate and discounted municipal bonds. Both will throw off tax advantaged cash and the tax advantage will be ever more critical in our political environment(taxes are going up, just how much is the question), and both have appreciation potential to cover inflation risk.
Unless of course, you have the helicopter Federal Reserve in your pocket to buy Wall Street skyscrapers for loan guarantees.
March 18, 2008 — 7:41 am
Greg Swann says:
> Thanks.
Te nada. I can work with investors, but only in Phoenix. I’m very careful not to make pronouncements about other markets, because this is the only one I understand. But here I can do cash flow neighborhood-by-neighborhood in my head. It’s amazing to me how quickly the switch went from “off” to “on.” As icing on the cake, global warming brought us the worst winter in recent memory — and snow is always good for Phoenix. Not guarantees of appreciation, but once we soak up this excess inventory, the worst of the pain should be over.
March 18, 2008 — 7:44 am
northern indiana real estate says:
Personally I think if you have the credit and the cash real estate is still the way to go. It is a resource that will always be in demand, and when the price is low you should buy. The price may not go up soon, but I believe it will go back up eventually.
March 18, 2008 — 9:59 am
John says:
I think it’s a good time to buy real estate and scoop up some unique properties, whether that’s a rental property or a small family home, but properties that offer unique attributes that will appreciate over time. That could be a property with a view or simply where no one else can build behind you. It could be a property close to a park or near shopping areas but away from the hustle and bustle. I think it’s about finding properties that are cash flow positive but have some characteristic that sets it apart and thus will appreciate sooner than most others.
March 18, 2008 — 11:09 am
Dave Shafer says:
Bottom line with investment real estate is how much rent can be reasonably obtained and will that rent go up in the future? Has there ever been a ten year period where rent did not go up in Phoenix? Answer that and you go a long way to answering your question about appreciation.
March 18, 2008 — 6:27 pm