So, if you’re interested in making money, you’re probably keeping a eye on the real estate market. Between the recession and the housing bubble, housing is starting to look like an attractive investment.
Of course, real estate prices probably aren’t going to take off anytime soon. However, its still possible to make money the old fashioned way – by collecting rent.
The question is: where is it profitable to own rental property?
Well, according to the latest in Forbes magazine, capitalization rates – or profitability is higher in some cities. Generally speaking, higher capitalization rates are better because it means real estate produces more cash. In 2009 capitalization rates were above 8.5% in:
Las Vegas, NV
North Las Vegas, NV
St. Louis, MO
West Palm Beach, FL
St. Petersburg, FL.
Note that a lot of these are in states where the housing boom was the most frothy. Now that prices have declined in these cities, its possible once again for rentals to be profitable.
A few things to keep in mind with capitalization rates and investing in real estate more generally.
1) Rates tend to be short term. Capitalization rates are expressed as the amount of operating income from a property (annual rent less upkeep, insurance and management costs) over the purchase price of the property. When prices for rental property go up, which they tend to do when rentals are profitable, then capitalization rates go down. So, don’t expect these places to be cheap forever.
2) When managing a real estate, the owner or someone who cares needs to be in close geographic proximity to the property. Unlike stock in your brokerage account or physical gold and silver, real estate needs someone local to manage affairs. This includes cleaning and showing the property, making repairs, collecting rents and problem solving if necessary. Many investors assume these problems can be addressed by a management company. Sometimes they can, sometimes they can’t. All in all this means there are practical difficulties if you are investing in a distant geographic area.
3) Real estate is capital intensive. This is a fancy way of saying that you need a lot of money for a down payment, for reserve funds and repairs. All things being equal, the more money you put down on a property, the more you profit. Lenders are now requiring at least 20% down payment for a personal residence or even more for an investment property. For an inexpensive piece of property- say less than $100,000 H you’re often talking about $20,000 to $30,000. For many people this requires a long period of saving or borrowing. Bottom line: even for real estate that’s relatively cheap, you still need a lot of cash.
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