So you’re looking for a good return on your investment. Need I say that returns on traditional safe haven investments are hardly attractive? A quick look on-line and you can see the top CD rates around the nation are 1.1%. If you want to tie up your money for 10 years you can turn to the higher yielding Treasury note that’s paying 2.41%.
With the current rate of inflation at 2%, CD’s are pretty much disqualified as a wise investment and Treasury notes aren’t much better. The Dow Jones Industrial Average is up 3.11% year to date, 13.4% since last year and the S&P 500 is even better – up 8.12% this year and 22.2% over the past 12 months.
So stocks look pretty attractive, but if you’re looking for something a little more conservative, have you considered real estate? While we can’t address your local market, there is a honey pot here in the Hilton Head Island/Bluffton area and it is the under $200,000 home and villa.
With the exception of the real estate boom of 2004 through 2007 when virtually anyone with a pulse was eligible for a mortgage, the long term rental market in our area has always been pretty healthy. Ironically, the very dynamics that impacted the long term rental market during that three-year exception is now actually contributing to the high demand of long term rentals.
It’s estimated by RealtTrac.com that nearly 1/10th of the consumer public who might otherwise be eligible to purchase a home is now sitting on the sidelines. Why? According to real estate experts, that 1/10th represents the number of people who lost their homes to short sales and foreclosures. Since qualifying for a mortgage for a seven year period will be daunting (see FNMA and FHLMC underwriting guidelines), these displaced consumers are adding to a rental demand that’s putting considerable pressure on the lower priced segment of our market.
Truth be told, I stumbled into the value of real estate as an investment in 2008 when I decided to take advantage of falling prices and upgrade from my current townhouse to a single family detached home in Hilton Head Plantation. When I pondered selling the townhouse or putting it on the rental market, I found out it was a no-brainer. Even with a mortgage on the townhome, the monthly rent provided me a positive cash flow, so rather than sell the townhouse for 75% of its 2006 value it made complete sense to hang on to it, making money instead.
The decision to keep the home has turned out to be a pretty good one. If you recall, Beaufort County was the fastest growing area of South Carolina during the real estate craze and for good reason. We live in one of the most beautiful places in the whole country, and as the economy cooperates the county has started to regain some of the momentum lost by the recession. The beauty of our area is just another reason for the demand on long term rentals.
A quick call to any local rental management company will elicit the same response. Inventory is under high demand and vacancy rates are extremely low. Vacancies are filled within weeks of availability.
Let’s take a closer look at why the under $200,000 real estate market has been a bright spot in our area over the past two years. Believe it or not, investors are grossing over $1,250 a month for 2-BR, 2-bath townhomes right now. With townhouses still attainable in the $125,000 price range, the numbers can be pretty attractive.
With real estate taxes, insurance, property association fees and repair bills running about $7,000 annually, the net revenues are about $8,000, or 6.5% on the cash invested. If you finance the home, the numbers look even better. A 25% investment on such a property ($31,250) returns a yield of 7.4%.
There are other elements of real estate that make it a very attractive element for anyone’s investment portfolio. In this area we direct you to your tax professional, but potential market appreciation when combined with taxable depreciation along with other tax strategies like Internal Revenue Code 1031 tax deferred exchanges may increase the return on real estate investing.