Houses
These are more easily managed than apartments and, like apartments, will always have intrinsic value. These are great options for those with limited resources to experience the residual benefits of positive cash flow. Houses can also be self-managed, allowing the investor to pocket the savings, increasing the cash flow. Those electing to take this route should put extra emphasis in the tenant selection process.
Coastal properties will bring high rents, but will have higher acquisition costs. Because of the recent run-up and even more recent implosion of home values, I highly recommend looking inland for properties. The costs of inland properties have PLUMMETED. The obstacles to homeownership have eased as of late, but can still be difficult to overcome for many people. As a result, rents are higher than ever. This is a spread that can be used for solid profits month after month for those with the ability to purchase an investment residential house.
Flipping can also work well in any market if they're purchased correctly. In down markets, the margin per transaction goes down, but the drop in acquisition costs can more than make up for that. It is not uncommon for flippers to switch their investments into buy-and-hold scenarios if they are unable to sell at their desired price.
It is important to select properties with minimal management and maintenance costs. It is absolutely imperative to limit your other costs as these will affect your cash flow. These include, but are not limited to, Homeowner Association Fees and Mello Roos Fees.
| Real-World Example:
A 3-bedroom, 2.5 bath, 1289 square foot detached home is for sale in Temecula for $170K. Assuming you'll need to put $10K into it, plus another $3K in closing costs, your total acquisition cost should be $183K (I didn't deduct money saved through negotiation because these are conservative calculations). Homes in the area of this size routinely rent for $1500-1700. Assuming 20% down, your PITI (Principal, Interest, Taxes, Insurance), at 4.5% (another conservative estimate at today's rates), $920 per month, or $11040 for the year. At $1500 per month, your rent income comes to $18000 for the year. After subtracting vacancy (5%) and maintenance costs, plus carrying costs as described in the above paragraphs, your profit will come to around $6060 per year (This is assuming you self-manage. If you choose the management route, your profit will be halved). At a 20% down payment ($34000 out of pocket), you are realizing a profit of 14.29% on your money on Year One. This doesn't include the equity build-up you are enjoying by having the tenant paying down your mortgage balance. This also doesn't include yearly rent bumps and their effect on your return. |
