The grass tends to look greener on the other side of the fence. Maybe that’s why some people invest in things they don’t understand. It has been said that the grass is just as hard to mow on the other side of the fence so stay with what your most familiar.
Single-family homes used for rental property give a person a chance to invest in something they understand: a home. They also have distinct advantages over other types of investments.An investor can borrow up to 80% of the value at fixed interest rates 30 years. The financing creates leverage so that the investor can benefit from the increase in value of the home not just the down payment.
It is reasonable to expect that the home will appreciate while providing tax advantages and practical control that are not available with many other investments. Low housing inventory in many markets has caused rents to increase and low new home growth will make it difficult to keep up with demand.
Consider a $150,000 home purchased for cash that would rent for $1,500 per month. With $18,000 income and allowing for property taxes, insurance and maintenance, it is still reasonable to expect $10,000 net income. There would be an 8% return on investment without considering tax savings or future appreciation compared with 5-year CDs paying less than 2.35% and a 10-year Treasury yield at 2.13%.
An added bonus is the amortization that occurs on the loan as the principal is reduced with each payment. It becomes a forced savings account that increases the equity and isn’t taxable until the property is sold.
The reasonable control has a lot of appeal to many investors who find the volatility of the stock market unacceptable and don’t want the risk associated with alternative investments.
The seller has three tools available to affect the marketability of their home: price, condition and terms. Price is the easiest to adjust for the competing properties, amount of inventory or market conditions. However, lowering the price is not necessarily the best decision when trying to maximize the proceeds of sale.
If a home is in poor or outdated condition, updating can be done to make it show favorably with other homes that are currently on the market. Sometimes, sellers rationalize not doing the work by saying they believe the buyers would rather make their own choices. The truth is that most buyers are using all their resources to get into the home and will have to live in its present condition until they can save enough to make the changes they want.
Another reason to go ahead and invest the money and effort into improving the condition is that it is difficult for buyers to imagine the home any other way than its current condition. When comparing one home to another, buyers will sometimes refer to a home as the “stinky house” or the “old kitchen” which may put it at a disadvantage.While price and condition are the main things that control the marketability, terms can be equally effective. Terms relate to financial considerations made by the seller to induce a buyer to make a decision to purchase their home.
Seller-paid points or closing costs, interest rate buy downs and owner-financing are examples of terms that may increase the marketability of a home because of the additional benefits they offer to buyers.
Increasing the marketability of your home is a great conversation to have with your real estate professional especially to help you get the highest price in the shortest time with the fewest problems.
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