Spring is here, and the real estate season is in full bloom! With a more balanced market and interest rates remaining historically low, I believe that we can expect a busy 2015 for the Flagstaff real estate community! Through years of experience working with many buyers and sellers across the real estate spectrum, I have found owning rental property to be a lucrative investment for those interested buyers.
And the future looks promising. As the Flagstaff community continues to grow, the demand for rental properties (single-family homes, condominiums, duplexes and apartments) will continue to rise. According to the Ratified Flagstaff Regional Plan, based on historical trends, Flagstaff’s population is expected to be 92,500 by year 2020 and 103,000 by 2030!
The current average rental rate for a three-bedroom, two-bathroom home is $1,440.00 (according to Realtor.com). Working families, and the roughly 25,000 students who attend Northern Arizona University, are the target market tenants for these properties. The demand is there and rental prices are strong.
Buyers who are looking to diversify their portfolios often forget to consider real estate. Gold, stocks and bonds are what many focus on. However, in a time of potentially high inflation, as we might certainly face in the coming years, tangible “real” investments are a wise choice. Real estate is a real commodity, and therefore, a great hedge against inflation.
When done right, owners leverage their investment while the tenant pays the mortgage. And the appreciation on the real estate, which grows over time, well, that’s the icing on the cake. Let me give you an example of how this could benefit you down the road:
Assume a purchase price of $250,000 with a down payment of 10 percent equals a loan amount of $225,000. We will take a conservative approach and use an interest rate of 4.5 percent. And we will assume appreciation on the property is four percent annually. After just five years, this leaves the buyer with net equity of a little more than $68,000. Remember, your renters will pay a healthy majority of (if not all or even more than) your mortgage payments. Amortizing the above scenario over 30 years, your principal and interest payment would be $1,140 per month. Let’s assume that you’re obtaining the average rent of $1,440 per month as mentioned above. And while it is essential that the investor pay close attention to the net operating expenses and cap rate to determine if an investment is successful, our example would easily pay the monthly principal and interest, and still contribute an additional $300 per month towards taxes, insurance, vacancy and maintenance.
The purpose of owning a rental property should be to pay down the mortgage until the investment becomes an income-producing property. Repeat the process, work hard and you could be the Donald Trump of Flagstaff.
I know successful owners of rentals who use 0.5 percent to 1.0 percent of a property’s cost to determine if the rental cash flow makes sense. In other words, a $250,000 property should rent for $1,250 (0.5 percent) to $2,500 (1.0 percent) per month. Ideally, you want enough money to pay your principal, interest, taxes and insurance (PITI) and put a little money in your pocket to cover the vacancy factor and maintenance. Every year, the value goes up, the loan balance goes down, and you get to write off the depreciation!!
Before you pull the trigger on a property, consider finding an experienced realtor. An industry expert who prioritizes you as a client, understands your personal investment goals and knows the Flagstaff market. Realtors are the first to know the moment a house hits the market. Without a qualified realtor, buyers can easily miss the best deals, the ones that are sometimes sold the day they hit the market. Also, be sure to seek counsel from a certified financial and tax advisor.
Are you a potential buyer? Once you decide a rental property investment is good for you, and you have found the right realtor, sit back and watch your money work for you! FBN
By Blake Cain
Blake Cain is a REALTOR with Russ Lyon Sotheby’s Intl. Realty, and is a USAA Movers Advantage Preferred Agent. He can be reached at 928-856-9071 or visit him online at www.blakecain.com.