Of late, the conversation swirling around Thurston County with regards to Real Estate is becoming more frequently centered around the rental market. By now, most everyone knows that in terms of the purchase market the inventory is low and home prices are on the rise. We have all talked about this with our friends and family and everyone has their thought on whether the rise in prices will continue, whether we're headed for another crash, or whether now is a good time to buy or sell. However, the conversation about the rental market, particularly from the investor standpoint, is becoming more and more intriguing and is what I want to talk about today.
To start, the average rental listing for June of 2018 in Thurston County was $1638* which is $200 higher than the national average. From an investor standpoint, let’s dig a little deeper into what this number of $1638 means. For instance, if you buy a home today at $300,000 (which is roughly our county average) and get a 20% down investment loan at 5% interest, your monthly mortgage payment (principal and interest) would be $1288. If we now estimate the insurance payment to be $750 a year and the property tax to be $3000 we can tack on an additional $312 a month to that payment. This gives us a total monthly payment of exactly $1600 which indicates this property according to market averages would generate a $38 a month cash flow.
However, a real estate investment is much more than a cash flow, with the other major factors being loan reduction, market appreciation, tax advantages, and rent appreciation. When you buy a home on a 30-year amortized loan you will reduce that loan roughly 2% in the first year, with that percentage increasing year-over-year. In terms of market appreciation, Thurston County has seen a 10.2% increase in single-family housing over the past year (which may not continue but it has been over 10% for the last 3 years). I am certainly no accounting expert, but I do know the basics, and a real estate owner can write the interest portion of the mortgage off of their income tax. Finally, rent has increased on average in Thurston County 5.5% over the last year. When looking at the potential cash flow, loan reduction, market appreciation, tax advantages, and rent appreciation, it looks pretty profitable to be a landlord right now. Even if you generated no cash flow, there is the potential for a 10-20% internal rate of return (which is basically a fancy term for the total return from these 5 categories).
So, the short answer as to whether being a real estate investor is profitable in Thurston County right now the answer is a resounding YES! Sure, the market is always changing and some people may argue that we are currently at the top of a market both in the rent and purchase market and that it is about to drop, and that may be true, I genuinely don’t know. But what I do know is that people still need a place to live, the loan will still be lowered, and your tax advantages won’t go away. Also, the market appreciation portion of the investment is only realized when you go to sell, so if the market drops all the investor has to do is keep the home rented and wait until the market rebounds.
At the end of the day, there are many different things that people can do with their investment dollars. The stock market has been hot and that is a great place for people’s money right now. Some people don’t like the risk of stocks and would rather buy bonds or annuities. Regardless, buying real estate is a tried and true way to make investment dollars grow. It has been in the past, it currently is in the present, and I have no reason to believe that it won’t be in the future.
*Avg rental prices from zillow.com