T Nation

Investment Properties

I wanted input from anyone with experience on their investment property. I have friends who own multiple houses and rent them out. They get good ROI, but it seems like a lot of work. Self storage seems really appealing, but it might be a high entry cost, and I worry about market saturation.

Low risk is appealing as well as being as passive as possible (I already buy stocks / index funds).

What do you think on timing of a purchase like this? I think timing is critical, and now perhaps isn’t the right time. What indicators would you look for to determine a good time.

If going for rental, do you have any metrics to determine a good buy. I have heard people mention cost vs monthly rent ratio as an indicator.

Really not committed to anything, just want to hear what the people with experience have to say.

My sister has a storage business. It appears to be better to buy an existing business such as this, rather than start from scratch. If you can run the numbers, and still make money with roughly 50 per cent filled, and have no structural issues, you are in good shape to buy. Over time, she has built it to where she is consistently 100 per cent all rented out. At that point, you can be choosy, and get rid of the deadbeats. And, believe me, you will have them.

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Have you looked into condos at all? They’re a bit easier to maintain since there’s usually a management company that takes care of all the exterior chores. At that point it’s just everything within the walls of the condo which should be pretty solid, and then finding decent tenants which is maybe the hardest part. We rent our condo to a retiree and it’s been nothing but great.

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Not all condo markets are suitable in each area. I learned many years ago that the condo prices are the first to drop in a down market, and the last to recover. Would I buy one to live in? Probably. That is different from an investment, though. Practically everything looks good at this time, especially here in the Atlanta area and north Georgia.

I’m thinking if I get into residential properties, I would look for duplex or quad homes. The HOA that comes with a condo scares me, and it would eat away at your profits, and they can keep raising rates)

What’s the purpose of the investment, capital appreciation, income stream?

In terms of a lot of work, I utilise a property manager that looks after finding a tenant, inspections, fire alarms etc. It comes with a fee (that comes out of the rent from the tenant) but worth it for me due to the convenience.

If you want a passive investment with low entry costs, look at some Real Estate Investment Trusts (REITs). There is likely a huge array on the platform you current trade equities on. You can look at residential REITS, storage REITS, industrial REITS, health care REITS, office REITS etc, or diversified REITS which is a combination of all of the above. The benefit of this type of investment is that you can have huge diversification with a small outlay as you are not concentrated in one area/property. The disadvantages is that in the short term, REITS have a high correlation with equities (but in the mid - long term perform more like direct property). Direct real estate also allows you to leverage your return (which could be done with a REITS utilising a margin loan but that’s a different topic) and also has the benefits of tax deductible interest and depreciation.

In terms of timing, jeeez, very hard to time any market. People have been saying Sydney’s property market has been in a bubble for a number of years now, yet it keeps rising. That being said, I am quite concerned about the disparity between household income and property value as a whole, a relationship that I do not believe can hold in the very long term.

In terms of good metrics, I purchased my property for capital appreciation over the next 10 - 15 years. Given this, I looked at factors that would likely increase the price in the future, such as; location, transport links, trend of migration into suburb and state, availability of housing around property, future development proposals etc.

A bit of both, but ideally a stable income stream. If I had a good property that yielded a good income, I would have a hard time selling something that brought in a good income.

I do have some REITs, but just in my 401K fund. I am not sure what type they are though.

I know people who bought two family homes at a relatively young age with the idea that they would live on one floor and rent out the other. The rent would then cover the mortgage or part of the mortgage, so they could either pay it off more quickly or just have more money to set aside for savings.

I think if you want to make money renting residential property, you need to have several. When you factor in mortgage, insurance, whatever upkeep like mowing the lawn or plowing snow (unless you will do this yourself), repairs (because things will need to get repaired at some point), there won’t be much left over. Imagine if the home you are renting needs a new roof. If you can do basic plumbing, carpentry, tiling, sheet rock, painting, electrical, etc., then that would be a plus.

If I were younger, and knew what I know now, I would have bought a rental property without thinking that it needed to provide any income. I would be happy if I broke even or even had to put some money into it every month. The intention would be that I would think long term and the first property would be a step towards eventually acquiring more. This is what a friend of mine did. He bought a two family home and lived in it. He paid off a big part of the mortgage quickly and then bought another property and another and now he owns a business complex. He’s a little over 40 years old now, he was in his early 20s when he started. He thought long term as he never wanted a “real” job.

This is why if going residential going with a duplex, or quad seems like a good idea to me. Less moving around for maintenance. Getting profits each month would be nice, but you are correct in that paying in some, but gaining capital could be worth quite a lot.

The primary purpose of the majority of investment properties is not for income, its a secondary feature. Leveraged capital growth is the main reason people purchase IPs. A popular strategy which would yield income is to purchase an investment property, let it grow for a number of years, the take out the equity against the loan to utilise for a deposit on another property… and repeat. You will then accumulate a property portfolio. If you accumulate 6 properties for example, the exit strategy would be to sell 3 of the properties to pay off the mortgage on the highest yielding properties. You are then left with 3 properties providing income, with no debt attached. But this is a long term strategy for income.

Without knowing your age and countries tax system, is it arguable that you should be focusing on capital appreciation as opposed to income. You are most likely earning an income so therefore any income received from your investments will be added to your assessable income and taxed accordingly, every year. Although you will be taxed on your capital gains for your investments that have risen, capitals gains tax is usually at a favourable rate i.e. lower than income and is only taxed once at the point of sale as opposed to each year. This therefore lowers tax drag and provides a higher after tax return, an effect that becomes more and more beneficial over time

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This guy knows what he’s talking about.

I’ll agree @2sides_whufc is correct in that is how most people make money especially in residential. I think perhaps the right property may be able to cover it’s own costs while gaining value and returning a profit. I’m not saying these are easy to find, but I think they are out there. I know a guy how did this with a quad home. He is now retired early just from that quad home in the Philippines.

To make income of a single “investment property” you will need to buy at a low point in the market (now is NOT that time), or buy a fixer upper, which you would fix up yourself to increase the rent you can get from it.

Remember that the going rent for a house will usually be about the same as a normal mortgage payment assuming 20% DP. If it was a moneymaker right away, why wouldnt everyone just buy an investment property for passive income? then you also have to factor in all the repairs you will need to pay for, basic upkeep cost, mediate neighbor disputes, tenants taking advantage of tenancy laws to cheat you out of money, etc.

You also dont want to put yourself in a situation where if the property goes unrented for a year for whatever reason you have to foreclose. A lot of folks who pay their 2nd home mortgage with AirBnB income had to foreclose this past year for example.

At the end of the day, you are probably only going to make at most a couple hundred extra bucks/month on a property you rent out. Is that couple hundred worth the extra stress of owning and maintaining another home and dealing with renters? Or would it be better to just look at it as an appreciating asset that your rental income helps to pay down, and let a property mgmt company take care of everything?

For me, my time is worth A LOT of money to me. So im going to rent my condo through a property mgmt company when i buy a house this spring/summer. The one asset you cannot get more of is time, so value it accordingly.

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For me it’s both. I look at capital appreciation as retirement savings and income stream as part of my regular income.

Despite the name capital appreciation, I think it often goes under appreciated. My rental is a 400K house in a market that has appreciated at an average rate of 4% over the last 20 years. .04 x 400k = 16 grand a year and that’s on an initial investment of only 40k. That’ pretty good and it continues to compound up…

The benefits of a property investment is that is does provide both appreciation and income. That’s why a good quality property is a great inflation hedge, as both the property value and the amount you can charge your tenants will increase in line with inflation. May be important in the next 3 - 4 years given the the increase in the money supply from Central Banks across the globe. However, as Californiagrown has mentioned, a property purchase does not provide a tremendous income stream initially. Given the increase in house prices, and thus the cost to finance, the rent provided from most IP will either just fall short or just cover the costs in the first few years. If you have a P&I mortgage and start paying down your loan, the income provided from property becomes more compelling over time. Therefore to manage mnbens expectations, the purchase of a property will very unlikely provide a solid income until several years after buying.

I agree. I think its due to capital appreciation being longer term and more of a paper gain, whereas you can see income coming into your account each month. What I think is criminally under appreciated is the power of leveraged returns. I was taught that debt was bad and to avoid it at all costs. Whilst I agree some debt is bad e.g. credit car, car loan (as its against a deprecating asset), your example above as illustrated how powerful it can be. If you took that same 40k and invested and achieved the same 4%, over 20 years, you would make $32,000. However, given you have leveraged and your initial investment is now 400k, you would make $320,000 over the same time frame. And really the leveraged return aspect is what the majority of people purchase investment properties for.

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