Is this a good time to buy investment property?

[spooked]

I am looking for advice...

I'm thinking abut buying an apartment building as an investment. Does anyone here have an opinion about this? It's a nice building with a solid rental history. Interest Rates are low, while money isn't making anything at the bank. On the other hand, I worry about a possible depression, it is in a mill town, rising cost of fuel and taxes, etc. I am in my 40's so it would be paid off in time for retirement.

Could someone here at DU (where I trust everyone's judgement for the most part!) give me some advice or their experience?

Thanks in advance!

[T Roosevelt]

1. My concern is the real estate bubble

This country is currently surviving on a real estate situation that I from what I've read cannot last. When the bubble pops, perhaps through rising interest rates, who knows how far prices will fall. Perhaps the location of this building will be shielded from this...

[jeter]

2. Ya, if you don't mind losing all of your money.

There is a bubble situation going on in the real estate market. Think the stock market circa 1999. That's what's happening in the Real Estate Market right now. You'll pay some outrageous price for the building and will have to wait 10 years or more to sell it at a price where you'll actually make a profit.

Also, with interests rates so low, tenancy rates are low to compete. Which means you won't make maximum $$$ on renting the units. Since it is more affordable to buy a home and take out a mortgage.

My advice, wait a year or so. When the real estate balloon pops. Then buy, buy, buy.

[On the Road]

3. Look at It on a Cash Flow Basis

Make sure there is plenty of margin between costs and rentals. I know that's simplistic, but most landlords fail because they don't have deep enough pockets to survive periods of high vacancy or major unexpected costs. Some books say you're lucky if you can cover the mortgage in the first year. I would want a bigger immediate return than that.

As far as timing goes, it depends on the market. Even if there is not a double-dip recession, any jump in interest rates will cause the markets to drop. Sometime in the next five years, I think prices will hit a point 20-25% lower than right now. Housing costs are typically 25-50% of take-home income. It's bumping against the upper limit right now.

I live in suburban Maryland, near DC, and the housing market here is overheated. I refuse to buy at these prices.

The market in working-class parts of Baltimore is different, however. There are 14,000 abandoned houses in the city and lots of people looking for a place to live. I bought three rowhouses early this year for a total of $79,000. (They each took $15-20,000 of renovations). On the first, I pay $525 for mortgage, tax, and insurance, and receive $970 in rent. I was inexperienced, slow, and sloppy, but that's is enough margin to allow for mistakes.

On the other hand, if you're going to hold for 30 years, the total of interest plus principal is more important than just the retail value. If prices drop and rates rise, you may not save any money over the life of the loan. That's why cash flow is best way to look at it.

The biggest variable may be job security in the town. If the town is dominated by a single employer in a single industry, there's a much bigger risk of mass layoffs and the bottom dropping out of the market entirely. Personally, that would be my biggest fear.

But good apartment buildings don't always come along. If you're going to be a landlord, you're much better off with multiple units than single-family houses.

[leftyandproud]

4. I think...

stocks and property are overvalued...though if you can get a decent rent income from it, it may be a good idea. I'm definately not an expert, but I have been looking at commodoties, and think it may be a good idea to buy some gold and silver during dips...Bush/Greenspan are killing the dollar, and solid assets are always better than paper in these times.

[cliss]

5. I live in Portland

and real estate is outrageously overpriced. The real estate market should have tanked a few years ago, but because of low inflation, interest rates have stayed historically low. Instead of coming more in line with reality, housing prices are jacked up way too high. A house worth only $50,000 will sell for $100,000.

My suggestion: buy the apartment building, but be aggressive as hell when you negotiate. Come in with an insultingly low figure, like maybe slightly more than half the asking price. Be prepared to walk away if they don't give you what you want. There are always more good deals down the road!! Just don't end up paying too much for the building.

Good luck!

[sistersofmercy]

6. There's not going to be a depression the dynamics are different

these days. Bush* is a horrible president, most divisive I've seen, never thought the country would be where it is but get this through your head THERE WILL BE NO DEPRESSION! That said I do expect interests to rise some time in the future but not to the excess of the 80's. People have worried about the "housing bubble" long before 9/11. If the apartment building has a good cap rate and a good steady market go for it.

[spooked]

7. Thanks for your great advice everyone

I'm leaning towards not buying the building because the monthly "income" would only be $150.00. Is that really worth all of the $$$ you have to pay up front?? The reason I wanted to buy was in hopes of market appreciation down the road, but I don't think that will be happening if (when) interest rates go up.
Any other thoughts?

Thanks again.

[DancingBear]

8. Arghhh!! Price by itself has NOTHING to do with buying

We've owned investment properties for several years now, and here are the rules we follow:

1) Whether to purchase the building or not is (almost always) solely a function of its cash flow. In previous times, when real estate could literally be "flipped" for a profit within months of purchase this was not always the case, but in todays climate it is. I lived (and bought) through the salad days when mortgages were given through handskakes (the S&L we worked with went belly-up).

2) Use these factors on the "expense" side of the ledger when figuring out if cash flow:

P&I
taxes
insurance
water/sewer bill (if landlord responsible)
management fees (if applicable)
other utility bills (I.e. are there "common areas" such as hallways that landlord would be responsible for)
vacancy factor (we use one months rent)
maintenance (we use 5-7%)
lawn/snow maintenance (if applicable)
advertising (ads, fees to rental companies, if applicable)

3) On the income side:

do one set of figures with current rents
predicated on what you realtor tells you, do a second set with projected rents

4) Remember that prices are higher now due to low mortgage rates. If you can lock in a low rate now (NOTE: if this is your first time investment DO NOT look at a 1 yr. ARM - find a fixed rate, or if not then a 5 yr. ARM is OK) do it - as inflation and mortgage rates rises your rents will increase, and the investment will become ever better as first time home buyers will be squeezed out of the market.

5) Find a realtor who has experience in investment properties!!! I CAN"T stress this enough. If they are doing what you're doing they will have the valuable insight (rental histories, tenant profiles, etc.) that you need.

6) If the numbers don't work, move on.

7) If you like to renovate, work on the theory of "everything plus 1". In other words, find out what the normal amenities for rental stock is in your area, and add one thing to it. These can (and usually are) simple things - a walk-in closet instead of a conventional one, a bathroom with a ceramic floor instead of linoleum, well, you get the idea.

Hope this helps - if I can be of help just PM me.