How many of us have wondered about the pitiful 1% returns we get on our bank accounts, and have thought that there must be other forms of investment with higher returns commensurate with their higher risk level? Even though bonds and munies are available, the returns that are locked in today will not be sufficient for the higher inflationary days heading our way.
One investment tool you should consider are income properties. They can represent a double hit against inflationary pressures, by generating increased rents to produce cash flow as well as deferred appreciation. We all know that rents are on the march forward, far exceeding the current inflation rate. We also know that the lack of construction permits in the past 6 years has resulted in one of the worse housing shortages in memory. But most of all, the ownership of 4 units and less is a manageable way to balance out and diversify your holdings with an element of higher risk that carries the potential for higher returns.
I’m not advocating income properties for everyone. You must not be risk adverse (like my wife) and you must have the ability to manage it. I don’t believe in management companies who only serve to eat away at your bottom line, providing minimal service and doing a lousy job at it as a rule. Plus, there is no better way to wrap your head around your investment than to visit the property weekly to collect Landlord mail, bang on a door to collect rent, check on the gardener, meet the contractor to fix the fence, and check on rents in surrounding properties. It’s no different than checking your stocks every day and watching the market, except in this case you’re in full control, unlike Wall Street.
The City of Los Angeles has different rules for income properties that are four units and below, such as triplex and duplex buildings. There are other concerns as well, including constant maintenance, refurbishing between tenancies, vacancies that can bleed your check book, and the onerous rent control that is practiced in L.A. and surrounding cities. (Only Glendale and Culver City have no rent control ordinances to my knowledge).
There are also upsides, such as managing better than the previous owner, and pushing rents higher in conformity with the local market. Assuming you don’t need to live on the income at this stage, you can quickly build up a positive cash flow and began to use your surplus capital effectively by accelerating the pay down on principal. The math works in your favor, resulting in a higher percentage of your monthly mortgage going to your principal, and thus your equity. Even the simple task of paying your mortgage one month ahead of time has a positive effect on your loan, or paying your mortgage every two weeks rather than monthly. If you generate a spreadsheet and watch values on a regular basis, you’ll see your investment grow larger and faster than your other safe havens, and you’ll feel better about a balanced portfolio.
I’ve followed my own advise, and in the past three years have bought three properties with partners. Each one of them has performed better than our projections, and the values of the properties are rising faster than we expected. Real Estate is a long term hold, so you should anticipate a 5 year minimum ownership period.
There are benefits to being a real estate agent, because it’s my business to follow property values, search out new listings every day, drive around for a curb-side view of a potential purchase and follow the rents as they increase. Buy it’s not rocket science, and you can do the same.
Next month we’ll look at actual figures, comparison of areas, and examine (by definition) three different approaches to evaluate the property as a potential investment.