If there’s one thing I know I will regret 15 years from now, it’s that I did not buy more rental property. When my kids become adults, they will ask me, “Dad, why didn’t you buy more rental property when you could? Prices were so cheap back then!“
The value of rental property has gone way up because interest rates have come way down post pandemic. It now takes a lot more capital to generate the same amount of risk-adjusted income. Yet, rental property prices haven’t gone up much at all. Hence, the opportunity.
If you look around the world, from the UK to Hong Kong, property prices have rebounded. Single family homes have rebounded strongly in the United States as well. However, rental property prices have lagged.
For 2021 and beyond, I believe real estate is going to be one of the best asset classes to own. We are spending more time at home post pandemic. Working from home will be a long-term trend that is here to stay. And mortgage rates will stay low for longer.
How To Decide When To Buy More Rental Property
Mortgage rates for rental properties are at record-lows because mortgage rates overall are at record-lows. You can check the latest mortgage rates for free on Credible, my favorite mortgage lending marketplace. Qualified lenders compete for your business, which means you increase your chances of getting the lowest rate possible.
Calculate The Rental Yield
Obviously, the higher the rental yield the better. To calculate a rental yield, you simply divide the total annual rent by your considered purchase price.
Real Example in war torn Vallejo, California. Bankruptcy Central.
Home Price: $250,000 3 bedroom, 2 bathroom house that once went for $500,000.
Current Monthly Rent: $1,500 based on 10 comps on Craigslist’s rental section.
Rental Yield: $1,500 X 12 = $18,000 / $250,000 = 7.2%.
Mortgage Rate: 6% on $250,000 if you unrealistically put no money down = $1,250 for a positive spread of $250/month.
The issues with this example are you have about $3,000/yr in property tax to pay, unknown operating expenses, and the risk of not finding a tenant for the full 12 months.
However, the upside is that your mortgage isn’t going to be the full $250,000. This is because you will put some money down and have less monthly payments as a result. And you have the opportunity to ride the eventual asset price recovery.
All Cash Offer For Rental Property
Another way to look at rental property is through an all cash offer. If you have $250,000 in cash lying around earning 3%/yr, would you be willing to earn a 4.2% premium (7.2% rental yield minus 3%) to be a landlord?
Some will say yes, some will say no way and demand more. This is what we talk about when we refer to “Equity Risk Premium” in the stock market.
Whenever you look at property, you must consider the realistic rental yield to make sure you are paying a fair price. And just in case you run into financial turmoil, you should be safe to know your costs will be covered.
Where you start making millions is when you start a fund, raise money, buy hundreds of properties, leverage, and then sell off a portion of your fund to shareholders. Some call this a Real Estate Investment Trust (REIT). However, let’s just start small and build the empire one unit at a time!
Rental property investments come down to simple math and income production. At an extreme, even if the $250,000 house lost another $200,000 in value, but is still renting for $18,000/yr, that’s all that matters in the meantime.
Yes, eventually rents will come down, but what is going on now is massive financial panic and implosion by individuals who bit off more than they could chew. Asset values have declined much greater than the decline in rents, and normalization will eventually occur. In the mean time, you should just collect the rental income and patiently wait for the right time to exit.
Happy rental property hunting!
Real Estate Recommendations
Explore real estate crowdfunding
If you’re looking to buy property as an investment or reinvest your house sale proceeds, take a look at Fundrise, one of the largest real estate crowdfunding platforms today.
They allow everyone to invest in mid-market commercial real estate deals across the country that were once only available to institutions or super high net worth individuals. Fundrise is the pioneer of eREIT funds and they are creating an Opportunity Fund to take advantage of tax-efficient Opportunity Zones.
Thanks to technology, it’s now much easier to take advantage of lower valuation, higher net rental yield properties across America.
Shop around for a mortgage
Mortgage rates collapsed during the global pandemic. Check the latest mortgage rates online through Credible.
They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. This is exactly what I did to lock in a 2.375% 5/1 ARM for my own refinance.
For those looking to purchase property, the same thing is in order. If you’ve found a good deal, can afford the payments, and plan to own the property for 10+ years, I’d get neutral inflation and take advantage of the low rates.
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