NOW IS THE TIME TO INVEST IN RENTAL PROPERTY

[Here’s] Four Reasons Why

by David Friedman, Member
FORBES REAL ESTATE COUNCIL

A few months ago, I was in the incredibly fortunate position of receiving a call from my real estate agent. He’d found a unit about to go on the market that would make, he thought, a strong investment.

After weighing a number of options, I ultimately decided to purchase a different rental property in Boston. Here are a few of the factors that led to my decision, which I hope can be helpful to those of you who are considering whether you should buy a rental property as an investment this fall.

Mortgage interest rates are incredibly low again.

There have been very few times in history when we’ve seen 30-year fixed mortgage rates hovering around 3.7% and 15-year mortgage rates slightly above 3%. This makes the math of buying a rental property as a long-term investment very much in your favor.

You can also consider interest-only loans. The nice thing about interest-only is that the monthly payment goes down since you’re not paying down principle. This can make the unit more profitable, especially in the early years when most real estate investments have tighter cash flow constraints.

Housing is shifting toward a buyer’s market.

For the first time in years, the housing market is cooling. Odds are, you’ll be able to find a property in your area at a fair market rate, where you’ll at least be able to use the rental income to pay off your mortgage and still have some profits from the rent payments alone.

When a recession is looming, rental properties can be one of the best places to put your money.

Predicting a recession is almost impossible, but most signs point to a slowdown in the next couple of years, if not sooner.

If you put your money in the stock market right before a recession, you’re in for a bumpy ride, to say the least. If you put your money into a rental property purchase in a city where rentals are constantly in high demand, like the Boston area, you will likely find yourself with much more stable investment returns.

Of course, the value of your property will likely go up more slowly or even decrease during a recession. As long as you keep the unit rented and are planning to hold for the long term, you’ll be able to wait out the recession while receiving a consistent cash flow on your property. Eventually, just about all real estate values recover and even grow.

The double bottom line is unbeatable.

While my first few reasons for buying a rental property this year all have to do with current market conditions, I’d argue that rental property ownership is more often than not an unbeatable long-term investment. Assuming that you own a property in an area where rentals are in high demand, you will have what I like to call the double bottom line advantage.

When you own a rental property, you have two sources of wealth creation: the money you get from rent yielding a net profit each month, and your home’s value growth.

Consider the following scenario: You buy a $400,000 rental property, investing $80,000 of your money as a 20% down payment. In the first year, you get $2,000 per month in rent for the property. After paying the mortgage, taxes, maintenance and insurance, you clear $150 each month in net cash flow, or $1,800 for the year. This represents a 2.25% return on the $80,000 you put down. Still, there’s more.

Now, let’s say during this period, the rental property also increases in value by 5%, or $20,000. This represents a 25% return on the $80,000 you invested. You’re now looking at $21,800 (home value increase + total rent paid), representing a 27.25% return on your $80,000 down payment. That is a superior investment to almost any other you can find.

I realize this example is overly simplified, but it does serve as an illustration of the double bottom line that you will see on any rental property. Assuming that you have a long view, you keep the unit occupied with tenants paying you rent and you purchase a rental property in a neighborhood where home values tend to appreciate over time, you should see very strong returns.