People often look at the Black Mountain area for investing in vacation rental property, a topic I will discuss at length at another time, but another part of the real estate market is long term rentals. Investors often look for this property, but it can be very difficult to judge the quality of their investment.
The rule of thumb used to be that monthly rates should reflect 1% of the purchase price. In other words, if you purchased a home for $100,000 then you should be able to rent it for $1,000 a month. That just doesn't happen in Black Mountain.
In general, no matter what the home's value, the rents are in a range of $650 to $1,500 per month. So while a home valued at $200,000 may generate a monthly rate of $1,000, a $400,000 will not generate a rental rate of $2,000. Usually, when rent exceeds $1,500 a month, the "renter" is looking to purchase a home rather than rent.
The Black Mountain real estate market is very efficient. I hardly ever see a property that cash flows--where monthly rental income equals or exceed expenses, including the mortgage payment. For that reason, it is very important that potential investors do a careful analysis of the rental market and their own expenses before delving into the real estate market. And investors often find that good properties with solid cash flow potential are very elusive.
Clark Mackey, president of Asheville Property Group, began his small company three years ago and now manages several long-term rental properties. He cites his own experience as an example of the difficulty in locating properties.
"I went a year and a half and made 15 offers on properties, none of which were accepted," he says. "I probably looked at 100 properties, and I wrote the offers based on what the rent will pay."
For Mackey, cash flow is only one consideration when purchasing a long-term rental property. For him and other investors, appreciation is another big factor.
What's interesting about property appreciation is that you're not just gaining appreciation on your down payment, but you actually see appreciation on the total home value. Say, for example, if you purchase an $180,000 home and put $70,000 down (financing $110,000). Assuming that rent pays all of the expenses, which can be a risky assumption, then the appreciation is based on the total value of the home, not the amount of the down payment. If the home appreciates 7.5% over 10 years, then the initial investment of $70,000 is worth $277,000. Of course this quick analysis assumes certain mortgage rates, etc.
Another consideration for these types of investments is the tax advantages. Depending on how the investment is structured, it is possible that all expenses, all costs, incurred with the house can be written off.
Michael Rauchwarg, Tax Partner with Dixon Hughes PLLC, points out that for investors looking to diversify, real estate can be a good opportunity if they do their homework first.
"A lot of people have done well in real estate," he notes. "But you have to want to be a landlord. And you have to be fully aware of what you're getting into. For example, can you survive a long-term period without rents? How will the property appreciate?"
As an accountant, Rauchwarg suggests a good cash flow analysis that assumes the worse case scenario. "Real estate might be a great investment," he warns. "But at the end of the day it might be easier to put the money into the stock market. It also helps to be a good handyman."
Maintenance and rehabbing of properties can add another dimension to the expense of time involved with rental properties. For Mackey, he learned a valuable lesson himself when he attempted to do his own rehab on a property. Assuming he would save money, he undertook cosmetic and small repair work on a property himself. He estimates it would have taken a contractor about 2 months to complete the project. With his own time constraints, it took him 8 months to finish, and he lost the rental income on the property for that time. In retrospect, he would have hired the contractor.
Mackey has gained a lot of his knowledge through real life experience, reading relevant books on the topic, and his association with the Carolina Real Estate Investors Association (www.creianc.org). And with his experience, he offers words of caution to anyone considering investing in the long-term rental market.
"Be very careful," he warns. "I tell everyone that there are a lot of 30-something year old men who quit their jobs to go into real estate. I don't want to be a 30-something year old man who quit his job to go into real estate and went bankrupt. It's very difficult to get a good deal."