By Steve Earl
President & CEO
Done For You Real Estate USA
It is probably one of the best times in the history of our country to invest in single-family residential real estate.
Interest rates are not high—they are normal.
Appreciation in many markets is not falling, it is a normal 3.5-5% annually.
There is “blue ocean”—you can make an offer on a property and expect to get it for a little below asking price in many markets and communities.
The future of affordable single-family-properties is quite simple. It is economics 101—simple supply and demand. There is still a shortage of millions of homes for those who want and need to buy. Though the government ratcheted up interest rates just enough to tamper down most primary home buyers ability to buy, and to get many investors to press pause because cashflow was lowered just enough to make them think twice. They raised rates just enough to put home ownership out of reach, but it has done nothing to lessen the demand…it is now just pent-up demand, ready to break out the moment rates adjust a little lower.
Here is why today is an amazing time to be investing:
THE MARKET IS NORMAL and normal brings predictable and amazing results that beat most other investments, including the stock market by significant margins!
Here is a typical scenario of the same home purchased but at slightly different interest rates in today’s normal real estate world:
Take a $300,000 home with 25% down and a 5.5% interest rate vs 7% interest rate.
The 5.5% interest rate purchase yields approximately $300/month net cashflow, the 7% interest rate purchase yields $100/month net cashflow. The difference is approximately $200/month. That means the higher interest rate property is missing out on approximately $2,400/year in net monthly cashflow. So, let’s say an investor says to themself, “ I am going to wait until interest rates go back down to 5.5% and then I am going to make my next investment because I am going to time things to where they are more ideal?” Let’s say that interest rates drops down to 5.5% in three years. That being your trigger to enter the market again and buy, you jump back in. Now, let’s look at this scenario. You decide to wait three years to purchase because your cashflow is too low by $200/month. If you could have bought today at the 5.5% interest rate you would have made an extra $2,400/year or $7,200 in three years. That’s a lot of money. However, let’s look at what you missed out on to make that extra $7,200.
The great thing about single family real estate investing is that the interest rate does not affect some of the other great benefits. In this scenario, if you bought this $300,000 property with 25% down at the higher interest rate of 7%, your principle pay down would still be the same of approximately $150/month. Over three years that equals $5,400.
Also, during this three-year period, you would be able to deduct another approximately $200/month of depreciation expense which equals $7,200 over that three-year period. Add the two together and that = $12,600, you’re ahead by $5,400! Now, let’s look at the appreciation you missed out on over those three years. If you take a $300,000 property and if we take the more conservative 3.5% appreciation, that is $10,500/year, or $31,500 for the three years! Add that to the $5,400 and you are ahead by $36,900! By saying that you wanted to wait for a lower interest rate, you have now lost out on nearly $37,000 of increase! But it’s even more! Remember that your cashflow, even at the higher interest rate was $100/month? Over the three years, that’s another $3,600, so our total is now $40,500! Deciding to wait for a slightly better interest rate has now cost you more than $40,000 in three years!
Investing today makes more sense than ever!
Many media outlets would have you believe that the sky is falling! It is not! But normal is boring and normal doesn’t sell. Warren Buffet, the greatest investor in the history of the world said, “I buy when everyone else is fearful, and I sell when everyone else is greedy”. Right now, everyone is fearful, and it is a great time to be investing in single-family homes in the right markets with the right strategy!
