Are Rental Home Investments Still a Good Idea?

In general, it’s always a good time to buy real estate. Some times are better than others, but so long as you buy within your means and are careful enough to avoid buying a money pit, you will be making a smart investment. Just remember that real estate investment takes time.

Knowing what I know about Real Estate and it’s long term benefits, it surprises me that more people don’t buy rental properties as a long term investment. I think this is because most people have the incorrect impression that real estate is something as complex and fast moving as stock markets and that buying an investment property feels something like betting on a horse – but with hundreds of thousands of dollars at stake.

To those among you who have such an impression, I say, turn off your TV. Those news shows are filling your head with garbage. The reality is that real estate values go up in the long term. Yes, there is this roller coaster of prices that you see constantly sensationalized in the media, but what they’re not telling you is that no matter how bad the real estate market gets, it will recover. When? Well, the answer to that can never be more than an educated guess. Stay far away from anyone who tells you that they know for certain what is going to happen next.

Consider the following:

The average price of a house in my area in 1982 was $71,944
The average price of a house in my area in 2006 was $306,880

The average income per household in the U.S. in 1982 was $27,391
The average income per household in the U.S. In 2006 was $77,315

(I wanted to use 2008 numbers but the U.S census bureau site only had data up to 2006 that I could find.)

My point:

The price of the average house in my area went up 427% in that time.

The average job pay went only went up 282% in that time.

Think about that for a moment. And think about how hard you’ve been working and how much you’ve saved over the years. Then think about what life would be like now had you bought a property back in the day when prices were lower and you had renters paying off the mortgage all those years. Even if you’re too young to remember 1982, this should still apply to you.

But it gets better. Think about this:

When you buy a rental property, it is paid for in part, in whole or if you’re smart/lucky more than paid for by someone else. Yes, you will have to deal with the odd phone call at some weird hour about something that is broken, and yes you will have to maintain and repair it. That’s the cost of doing business. And if you don’t want to bother with taking care of the tenants yourself, you can hire a property management company to look after it for you.

So, just for fun, let’s  say that you buy a house for $235,000 and get the 35 year amortization on the mortgage. (A long amortization like this means that more of your payment money is going into the pockets of the bankers and less is paying off your house. But it makes for low monthly payments.) Let’s say that during that time the very nature of real estate values and inflation enter some strange dark eternal winter. You rent the place out for 35 years, never increasing the rent because there’s no inflation in this strange time and the value of the property remains the same the whole time! (Oooooh…. it’s like an X file! Cue the eerie music.) Financially speaking, the property turns out to barely break even because you have 35 years of bad tenants and there’s all sorts of problems with the place.
But guess what…

In the end you’ll have a free house that is worth $235,000. A free house. Now, just what kind of retirement do you think you could have with that kind of money? I could think of a few things I’d do with it…

To reiterate, as long as you’re able to pay for what you buy, and you are diligent enough to buy a place that is in decent shape and suitable for renters you should be okay. As long as you rent it out at a decent price following the local laws regarding tenancy, you’ll be fine. Most of this is information that your Realtor can help you with, but in the end it’s up to you to decide what you can and can’t afford.


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