Buying Investment Homes
There are many people who have used real estate investments for retirement. And many have lost their shirts with real estate. What is the difference?
One difference is long-term versus short-term investors. The people I have known who have done well with real estate invested long term. They might start with a first home and then rent out the first home when they buy a second. Then they move again several times and each time retain the old home—renting it out. With 30 year fixed mortgages, after 30 years the loans are paid off and most of the rent goes toward income with a smaller amount going toward taxes, insurance and repairs.
Lots of short-term investors bought multiple homes in 05 and 06 when prices were going up—assuming that prices would continue to go up and they could flip the homes for a higher price in the short term. Some made short-term gains. Other lost their investments through short sales and foreclosures when prices shot down.
The best way to invest is to buy a home you can really afford—given the vagaries of the rental market and housing prices and the certainty of the need for repairs.
If you buy a home as an investment, make sure you can afford it. You have to make the principal and interest payments each month plus pay taxes, insurance and water, the latter of which is an increasing expense. Consider that rental markets move up and down and everyone deals with vacancy at some point. You have to be prepared for it and have to have enough money to cover monthly expenses when there is no rent coming in.
One other problem is repairs. You may be disappointed to find that renters don’t always take care of your home as you would. Also, they won’t always tell you what is wrong and problems worsen. I recommend that you do a yearly inspection of the home. Many owners are reluctant to disturb their renters and are sorry after 5 years when they find multiple unreported problems in the home that should have been corrected earlier. Renters sometimes don’t report them for fear that their rent will go up if they report maintenance problems. Most new investors make the mistake of stretching their investment dollars and not retaining enough cash for maintenance and vacancy, which take investors down.
Another mistake is to invest in properties out of town. Besides not being on top of vacancy trends in distant markets, it is very difficult to find good property managers. The managers promise a lot, but it is a low margin business and many rental agencies don’t try as hard as they do with their own properties. They lag in pushing to fill the properties and they may not do a good job of keeping maintenance costs down. If they have their own staff of maintenance people, the payroll and benefits of maintenance workers are passed on. If they respond poorly to tenants, the vacancy rate goes up and the investor pays.
San Diego housing is more affordable than it ever has been. It is a great time to buy income property right here. When evaluating a property to buy, consider the monthly principal and interest, taxes, insurance and water bills that have to be paid monthly. Put in a larger factor for maintenance than you were expecting. Washers and dryers go out, garbage disposals stop working, and plumbing goes awry. Rental properties are one place that it is a worth buying warranties on appliances. Factor in a couple months of vacancy each year. And consider that every time a tenant leaves, you will spend some money on painting, etc.
You can get a good fix on rental property prices by consulting Craig’s List for your area. Make sure you keep rents in line with the market, and don’t raise rents because your expenses increase. Only raise the rent if you see that rents in general are on the increase. Losing a tenant and the associated vacancy/repair costs can be very expensive. Tenants can leave if they get a better deal somewhere else.
Finally, single family homes or multiple detached houses on a lot are the best bet. Condos are the first to sink in a down market, and carry more risk with the financial woes of some homeowners associations—especially associations that had a large number of investor-owners who stopped paying association dues when their investments went into foreclosure. Fees for the other owners went up in order to pay monthly costs.
There are a limited number of single family homes in central San Diego, and the shortage produces high demand for families who need them. Since land is more valuable than homes in San Diego, having two detached homes together on one lot produces a good return on investment. Other good investments are in college areas, as the number of college students is expected to rise over the next several years.
Finally, if you are going to invest, I would suggest getting a copy of Nolo Law’s Landlord’s Rights and Responsibilities in California. It will keep you apprised of tenant laws which you must follow to keep yourself out of court. Real estate investing can be lucrative over a life-time if it is done following the simple guidelines noted above.
