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Is It a Wise Investment to Buy and then Rent?
By Jonathan Haeber
CMR Columnist
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We've seen the infomercials. They all purport that you can make a fortune in real estate through buying homes (often in bank liquidation auctions), offering them up for rent, and parking your mortgage investment as it accrues equity and your home value appreciates.
Current mortgage rates are favorable to the investor, but does that necessarily mean that you should invest? Let's investigate. First we'll look at the two types of investment: flipping and renting.
Flipping Homes
When real estate is hot, flipping is a common practice. This is when an investor buys a home with a mortgage, adds a few cosmetic touches, and then puts it back on the market at a higher price. Sometimes, this is profitable, but only in periods of high appreciation and low current mortgage rates. Also, the federal government taxes any home sold in a period of less than 12 months as regular income (and any homes after 12 months as capital gain). Regular income tax on a home can be up to 20% higher than capital gains tax, so be aware of current mortgage rates and trends in the housing market before you buy to flip.
Renting Out Homes: Making Low Current Mortgage Rates Pay Off
Buying and then renting is another practice of real estate investors, fraught with its own difficulties. Before you decide on buying investment property to rent, you should calculate the cash flow of the investment. The cash flow is the total amount the home would bring in, minus all maintenance expenses, taxes, and mortgage payments.
In The Washington Post, Steve Hendrix humorously assesses the amount of toilets he owns by adding up the bathrooms in his investment properties. He recounts his friend telling him, "Landlording is work. You never have to fix a dripping faucet on a stock certificate."
Hendrix ends the story by describing his final investment "plunge" of buying a vacation rental in Guatemala. "This scheme may never show up in a real estate seminar," he writes, "but I'd like to propose a tenet for the sub-genre of vacation rentals: Invest in a place that you love yourself."
Before You Apply for a Mortgage
If you're considering investing in a property, you should carefully look at the responsibilities you'll have. Becoming a landlord takes time; you'll have to pay additional property taxes; and finding the right tenants can sometimes be a painstaking process. It also can be a smart investment move, considering the current mortgage rates, and as long as you know what you're getting into.
Sources
"The Latest Fad in Housing," Christian Science Monitor
"Taking the Plunge," Washington Post
About the Author
Jonathan Haeber is a marketing writer for Discovery Channel Stores. He recently purchased his first home, and took a self-taught crash course in home mortgages.
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