How to Choose an Investment Property That Earns You the MostBy Jeff Brown
What type of investment property should you buy
-- a condo or single-family home? Until recently, that was a trick
question, as real estate was too risky and illiquid for most investors
. But growing evidence of a rebound in the housing market reduces the risk your investment property
would lose value
. Rising prices also improve your chances of selling
without too long a wait if being a landlord doesn't suit you.
On Tuesday, S&P Dow Jones Indices reported that its
S&P/Case-Shiller Home price Indices showed home prices gained 7.3%
nationwide last year. Various other surveys have showed gains
but the Case-Shiller gauge is widely viewed as one of the most
definitive, and it's a very healthy gain. "As of the fourth quarter of
2012, average home prices across the United States are back at their
autumn 2003 levels," the firm said. That's a good-news/bad-news
statement: good because the market's improving, but also a reminder of
how bad things were.
Low mortgage rates
make homes very affordable at today's prices, and investors have become
very active in many markets. If you've already decided you can live
with the hassles of being a landlord
what type of property is best -- a single family home or condo? To a
large extent, that will depend on the individual market. In communities
such as the Florida
coast, there may be many more condos than single-family homes. In suburbs and rural areas, single-family homes dominate.Rental
the two types of properties are a key issue. Investors generally assume
it will take four or five years of rent increases for income to cover
maintenance costs, taxes and other expenses. If there's a glut of condos
or single-family homes, you may not be able to raise rents very fast,
prolonging your time in the red. Of course, a glut also means home
prices will not rise very fast. The ideal rental property is in high
demand, allowing the owner to raise rents every year and assume that
property values will rise at a good clip.
Generally, operating costs are easier to estimate on condos, because the
exterior work is covered by your association fees. With a single-family
home, costs for a new roof, landscaping and exterior painting could hit
you out of the blue. Another factor to consider: the type of renter
likely to be drawn to your property. A recent survey by Premier Property Management Group
, which manages 1,700 properties in 20 U.S. cities, found that renters of single-family homes
are 18% more likely to stay in the home for five years or longer.
Generally, that's good for the property owner, because each change in
tenants can mean going a month or two without rent.
The survey noted an increase in recent years of the number of single-family homes for rent
. That's due, in part, to the large numbers of foreclosed properties
that have been turned into rentals and the difficulty many renters have
had in getting mortgages. "Single-family renters make more money and
are nearly twice as likely to have children as apartment dwellers," the
survey found. Around the country, the median income for single-family
renters ranges from $75,000 to $100,000, compared with $50,000 to
$75,000 for renters in multi-family housing. About 63% of single-family
renters have children, compared with 34% of multi-family renters.
Single-family renters also tend to be older.
No doubt, there are lots of terrific tenants among the childless 20- and
30-somethings who prefer multi-family housing and are likely to move
fairly often. But tenants who are older, more prosperous, used to
dealing with responsibilities such as children and likely to stay in the
home for a number of years can be especially appealing for the property
owner. With an unusually large number of renters of this type looking
for homes, the single-family investment property is worth considering.
Fred Yancy, Broker