Wednesday, October 03, 2007

Why income producing properties are still good to have

My (our) guiding principle in buying houses is that you should be able to easily get rents above your mortgage payment. As long as you have that, even if home prices go down you have a profit each month, plus the fact that you do have a profitable property means you likely won't see depreciation on that property. Remember the statistics are for the whole city, and you only buy one property at a time (Okay, well sometimes 6, but that's a story for another day).

Plus as is happening in housing markets across the country, rents can actually rise as fewer people can get a mortgage and foreclosures increase the number of renters.

The data is now starting to back that up. Rents increased 1.3% nationwide just in the third quarter. And that sounds like a small amount but a couple points. One we're talking about just 3 months. Also, 1.3% is the absolute level, but you need to think on the margin.

Here's an example:

Purchase price: $200,000 (downpayment: $40,000)
Mortgage Payment (includes taxes and insurance): $1000/month
Expenses (repairs, management, etc): $100/month

Old Revenue: $1300/month

So before you have $200 profit per month, so about $2,400 per year, or 6% of your investment (your down payment).

New Revenue (after 1.3% increase): $1317

Your expenses haven't changed, so now you're making $217 per month, or about $2600 per year, which is 6.5% per year on your down payment.

So this property owner saw his profit increase from 6% to 6.5% per year. In percentage terms, his annual profit went up about 8% in three months. Now keep in mind that we're talking about 3 months.... so 1.3% isn't small at all. And you expect incremental increases over time, while your expenses go up at a much slower rate if at all. (though over the very long term rents can only go up as much as income, so hopefully we'll get to see some income increases in the country).

This varies by city of course. New York and San Fran rents were up more than 3% in the third quarter, so those landlords are really smiling (one big plus of New York is that unlike expensive markets across the world, New York rents are just as high as the prices (though it's still probably difficult to find a profitable property to rent out in that city).

And there are markets such as Phoenix (mentioned in this article here) where rents are simply down or going up very slowly (keep renting, Phoenix friends and family!)

Addendum: I love to see the economic adjustment apparent in the comments on the above linked article from a NY renter.
I wish it was only (the average NY rent increase of) 3.6%-my rent went up over 6% this year, and that was after talking him down from over 10%. (Last year was a little over 4%) Buying looks better than beforeā€¦


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