HOW TO MAKE MONEY OWNING PHOENIX INVESTMENT PROPERTY AFTER THE REAL ESTATE RECOVERY?
WHY INVEST IN RESIDENTIAL INCOME PROPERTY:
Our real estate market has recovered and we have a new norm. Real estate is higher priced, rents in desirable areas are going up, risks are lower and real estate is back in high demand.
What can real estate investors expect now? The reasons investors were originally attracted to buying real estate remain unchanged. They bought because they liked:
1) the security of owning a tangible asset,
2) real estate can be acquired by borrowing most of the money needed to purchase it with the buyer only having to bring 20-25% of the purchase cost to own real estate versus having to pay 100% of the acquisition cost for all other investments,
3) real estate is able to generate income and operate as a self-sufficient, self-funding enterprise or nearly so,
4) owning real estate offers numerous tax advantages that no other investment type can provide,
5) real estate is so highly valued that everyone requires real estate for shelter and
6) real estate is universally desired to be owned by everyone in the industrialized world. You don’t have to promote or justify owning real estate when everyone already needs and wants it. Nothing has changed. All the reasons to own real estate are the same now.
INVESTMENT RETURN MEASURED BY ASSET APPRECIATION WITH MONTHLY CASH INFUSION TO COVER COSTS:
Before the real estate crash officially began in Arizona in 2006 with prices peaking and short sales and foreclosures becoming commonplace, real estate would NOT generate sufficient income to cover monthly costs and the investor had to contribute $200 - $300 per month to make up for the shortfall in revenue to pay expenses from other sources of investor money.
This could easily be justified because appreciation of the home’s value was going up 10 times more than the money needed monthly to cover the shortfall of Phoenix rental income until the property was sold. While it would have been preferred to have the rental property income pay all costs, the return on the extra money paid to cover income shortfall provided a better return than the bank would pay the investor to park his money there.
RETURN MEASURED BY CASH ON CASH VERSUS APPRECIATION:
After the collapse of our bond, stock and housing markets, investors believed real estate would never be able to produce positive equity/appreciation, as it had been doing for decades. Instead, investors evaluated the quality of the investment property based on its cash on cash return, requiring their Phoenix real estate investment to generate more income than their total monthly real estate expenses PLUS a monthly cash return as monthly payback.
CURRENT STATE OF PHOENIX RESIDENTIAL INVESTMENT PROPERTY:
Our current residential investment property in Chandler and Gilbert is now a hybrid market that supports both methods of measuring the value of owning residential real estate investment property in Chandler and Gilbert AZ.
MONTHLY TOTAL REAL ESTATE EXPENSES THAT RENT SHOULD COVER:
Most investors opt to put down 25% to purchase investment property versus the minimum 20% because of the lender incentives built into the lending terms. A higher down payment also facilitates Chandler and Gilbert real estate investment property being able to generate sufficient rental income to pay all basic monthly expenses (PITI+HOA+PM) of: repayment of Principal, Interest, 1/12 of annual property Taxes, 1/12 of annual homeowners Insurance, monthly homeowners’ association (HOA) dues and monthly property management (PM) expense. Ideally additional rent is generated to pay for emergency repairs, annual home warranty contract renewal and cost of replacing a vacating tenant.
STATE AND LOCAL CITY PRIVILEGE TAX:
Currently tenants are being charged an additional monthly fee above the rent to pay city privilege taxes – 1.5% of the rent per month in Chandler and Gilbert. See post for Privilege tax rates applicable in other Arizona municipalities for stays longer than 30 days.
Arizona requires residential real estate landlords to pay the same hotel/motel transient lodging privilege tax rates for short term leases less than or equal to 30 days is 5.5%. For stays that extended and exceed 30 days, the TPT rate reverts to the municipal rate only.
MAXIMIZING RENTAL INCOME – HAVE LEASES RENEW DURING PEAK RENTAL MONTHS:
There are peak buying/selling/rental months when there are more people actively in the market. If you bring a property to market when it is a more difficult time to locate a tenant, don’t write a 12 month lease and find yourself at the same disadvantage a year later. Step up and generate a lease that is longer or shorter than a traditional 12 month lease, so your next lease will occur in a more active market. Don’t miss a month seeking a higher rent. You will never make up the lost rent. If you must discount the lease to get the home rented, write the lease period to end when it will be far easier to replace the tenant paying a discounted rent with a higher rent possible in a high demand rental market period.
More investment tips to follow. If you need an answer to a question you have now, contact me for help. You will be helping me with topics for future blog posts, too.
For assistance in finding a gem of a home, Contact Sam. With 27+ years of experience he knows where to find high value, high return Phoenix investment properties in Chandler, Gilbert, Mesa, Scottsdale and Tempe AZ.
Arizona Associate Broker, CRS, GRI, e-PRO, SFR
Berkshire Hathaway HomeServices Arizona Properties