It’s A Better Investment…
If you are investing in anything, the end goal is to make money. Assuming this is your goal, we need to decide the best means to accomplish this result. Over the past few quarters and I believe into the next several quarters, I hear talk about investing in other areas because of cash flow. If you are in this position, this article is for you. I’ve been told: “I’m buying investment property in other areas because it’s a better investment.” This is a great way to start a dialogue about investing in real estate. First and foremost, we are fortunate to live in an area with such a robust and desirable market climate. This fundamental demand makes our region one of the most desirable destinations across the globe, so when considering investing in other regions it is important to first acknowledge that few other locations compare to home. Locally, our experience of real estate is very different from most of the country. The concept of real estate being a depreciating asset doesn’t quite apply. But as you go through the years enjoying appreciation of your home you may want to spread the wealth by investing in rental properties.
Going through the process you will do online research, talk to professionals and may even talk to friends about their experiences. You will likely recognize the positive cash flow possibility in rentals has diminished as the market experienced double-digit growth over the past few years in the starter-home range and prices have rebounded. Now that the local investments do not offer exciting cash flow, many tend to look at out of area locations that generate positive returns. Is this the best long-term investment strategy? A good way of starting the conversation is to ask you three questions:
Why do you want to buy investment property? Maybe your goal is to maximize your principal investment through appreciation, or looking for maximum cash flow or maybe a tax haven. Real estate is back to the hot list of investments, but not all real estate is alike. If your goal is to maximize your principal investment you will be looking at income and expenses over the life of your investment; if the investment has negative cash flow (if you’re buying with cash, there is still a cost of sitting that money in the real estate asset verses investing elsewhere) you are betting on steep growth to offset the final investment analysis. Don’t forget that properties take a great deal of maintenance over the life of ownership and you’ll need to reserve funds to maintain them: water heater, HVAC, roof, painting, flooring, faucets and fixtures, to name a few. So if you are maximizing the initial investment you are betting on strong appreciation. If you are seeking positive cash flow you are looking for an investment that generates the best income source, whether to supplement income or to put in the bank. If we are buying investments out of area it is likely we are seeking the cash flow. So does this investment property generate the best investment cash flow for you?
Why are you looking in areas outside your driving distance? I ask this question because many people will be looking at investments far from their home. Likely you are looking at properties outside your drivable distance because the cash flow is better. On paper it looks very attractive: strong rents, low interest rates, and low home prices. But many of these areas don’t have the appreciation like us, so you may be sitting on your real estate investment for some time. Is there a better investment than buying that kind of property?
What is your exit strategy? How are you planning to get out of this investment and when? Locally, we have a market that is usually driven by low supply and high demand. The idea of taking more than a month to sell a property seems odd, but if you are trying to unload your investment property in Arizona, you may be sitting on the market for a long time as you may be competing with many other available properties. So do you want an investment that is hard to sell? Real estate is not known for being a liquid investment, but locally we don’t feel that as much.
So are you ready to run out and buy an investment property? The national real estate market is extremely different from our market, so I think it is prudent to consider why you want to buy investment property before buying out of the area. A recent Gallup poll survey highlighted very interesting data about what Americans think is the best long-term investment.
I was shocked at the results, but what did not surprise me is how people’s opinion moved with the market. For example, when gold was at the high point, so was its popularity as the best investment. It has since come down as the best long-term investment. As we consider where to invest our hard-earned money, we should consider where it will generate the highest return. According to Robert Shiller of the Case-Shiller index, home prices look remarkably stable when corrected for inflation. Over the 100 years ending in 1990 – before the recent housing boom – real home prices rose only 0.2 percent a year, on average. The smallness of that increase seems best explained by rising productivity in construction, which offset increasing costs of land and labor. Nationally, we are still rebounding from the real estate crash and have recognized little appreciation since 1987. During that same time, other investments such as S&P 500 have returned an inflation-adjusted annual return of 6.32% since 1929. Our local world of real estate is a different animal, but if you are considering buying investment property on a more national level, it is important to consider this kind of data to decide if it is the right investment for your family.
Is it a better investment to buy out of area real estate than local? It is not that simple. There are many considerations, but I suggest asking this question: What is the right investment: real estate, stocks, bonds, gold, bitcoin, or just plain hard cash under the mattress?
As the market continues to transition through its cycle we will need to stay on top of what makes the best financial sense. Over a market cycle it is not always a buyer’s market or a seller’s market. Sometimes it is good to be aggressive and other times conservative. I strive to provide challenging questions to you in order to help make the best investments for you and your family. In this dynamic market it is important to stay focused and ready. You never know when the next best investment opportunity will be upon you.