Single family houses offer three primary investment benefits: They can be bought and financed to provide net rental income without regard to appreciation potential and still make a lot of sense. I know a Californian who has bought a dozen or so houses in a small town in Iowa. There is very little appreciation because the population isn’t growing, but there is a strong rental market because of a local college. The houses he paid $15,000 for a few years ago are still worth about the same, but they stay rented for $500 per month. Even allowing for 40% shrinkage due to operating costs, that boils down $3600 per year net return, or more than 20% yield on his cash investment. He’ll have recovered his entire investment in less than 5 years and from then on, it will all be gravy whether or not the houses ever appreciate, or even sell for that matter.
Single family houses are most often bought by investors for appreciation. That’s certainly one of the major ways that a single family house can create profit, but where prices are rising swiftly, holding a house for appreciation is often at the expense of years of negative cash flow. So long as an investor is well heeled enough to only finance a house to the point at which it breaks even on cash flow, holding long term for appreciation can be a great idea. Unfortunately, except in areas where there is very high appreciation and where lenders are willing to permit owners to refinance to capture this value, very few highly leveraged investors have the staying power to hold on long enough to reap this harvest. We’re seeing this loss of equity in almost every market where growth has slowed, or lending has tightened.
Because of very favorable taxation, upscale single family houses used as personal residences can produce as much after tax profit as an investment house that loses money each year. This is because the investor’s negative cash flow is buying a great lifestyle in a nice residence in a neighborhood where schools, amenities, and infrastructure is better. When the house is sold and all gain captured tax free, buying and selling a personal residence every two years can build an estate about as fast as any other form of house ownership, with a lot less stress and anxiety.
Of course it’s possible to temper one’s enthusiasm and to buy fewer houses with less leverage and more cash flow and to wait while the tenants pay off the mortgages, That’s what I did, and what most of the truly wealthy single family house investors I know have done; but it requires patience that few investors in today’s market possess. So my advice to them is to buy a nice house and move in; and to buy fewer negative cash flow houses.
