Investing in Rental Property

In spite of all of the bad news regarding the American economy, there IS one bright spot on the horizon, and that is the real estate market. This particular market niche is a lesson in one of the paradoxes of capitalism: when the economy plummets, so do land and real estate prices. This creates an atmosphere that is conducive for the buy-low-sell-high investor. In turn, reinvesting money into real estate actually begins to create a rallying point for the economy by stimulating financial coffers.

It’s always been this way; from the world famous Astors, whose forebearer, John Jacob, came over to the newly formed Republic in the middle of the 18th century, to the Rockefellers, big money has been made in the real estate market.

When deciding whether or not to purchase a second home, there are several considerations worth noting. For the purpose of this discussion, we will look at investing in a second home from an investment standpoint only; in other words, we’re not talking about purchasing a vacation home, except for this one thought: when land and real estate prices bottom out, those looking to invest in vacation homes are at just as much of an advantage as those who are looking to increase their investment portfolio, for many of the same reasons.

Currently, the greatest concentration of home foreclosures are in Florida, California, and Arizona; the states with the greatest number of vacation homes. These are also some of the more heavily populated areas in which rental property is always in demand. In order to decide whether or not the title of “landlord” is for you, here are some important questions to ask yourself and your financial advisor.

Are you looking to make a fast buck by reselling the property once the market picks back up, or do you want a long term investment that will offer tax advantages in the coming years?

Are you willing to risk the fact that you might have a negative cash flow in the beginning?

Do you have the stomach to handle the stress of managing rental property? Being a landlord and the person ultimately responsible for a piece of property is not for the fainthearted.

What market niche are you wanting to serve? Are you interested in single family dwellings or would you prefer a duplex, where you could ultimately end up earning more rent with the same number of square footage?

Are you handy? Can you handle some of the inevitable repairs yourself? If not, you may need to consider a repair clause wherein your renters pay for the first $50.00 of all repairs.

According to the National Association of Realtors, second home sales have been declining since 2003; in 2008, the second home market decreased to 30% of all existing and new home transactions. There is opportunity out there for those who are willing to do their homework. If you have second thoughts, talk to a certified public accountant that specializes in real estate property; he can produce some spreadsheets to counter any what-if scenarios you may be envisioning.

In no other area is the adage “if you want to make money, you’ve got to spend it” more appropriate than in discussing real estate investments. The financial advantages are there; only you can ultimately decide if it’s worth the risk and increased responsibility to take the plunge.