Over the past 12 months, the median home price in Arizona increased by 23.9% (to $409,000). This is a very steep increase in home values. Calling this current real estate market “hot” is an understatement.
One of the common questions we get in response to this market is: “The real estate market is doing well. Is now a good time to buy a rental property?”
The Answer? It depends.
Here are three considerations to properly answer the question for you.
1. What is your motivation?
We receive an increase in inquiries about real estate when the market is on the upswing. Higher home values and price increases are all over the news. This increase in home values has everyone wondering, “Am I going to miss out on an opportunity?” Sadly, it is FOMO (fear of missing out) that makes the inquiries increase. This fear should not be a primary motivating factor when making any financial decisions. Especially investment decisions.
Be honest with yourself. What is your motivation? If it is FOMO, you should probably disengage from buying an investment property and do so when you have a more sober-minded approach.
2. Do you want to be a landlord?
As mentioned in this blog, being a landlord is not for everyone. As I discussed in this video, I am never going to do it again. It was a big pain in my butt.
The problem with being a landlord is that it is often a full-time job. And that full-time job on top of your other full-time job can be a major disruption to your life. Being a landlord negatively impacted my ability to be the husband, dad, business owner, and friend I wanted to be.
But there is good news! You can hire out for this. The problem with hiring a property manager is the cost. Which leads us to the next thing you need to consider.
3. Does the math work?
It does not matter how hot or how cold the market is. If the math works, then it could be a GREAT idea to buy a rental property. Here is the math you need to do:
Annual Income minus Annual Expenses minus Margin = left over
Did you see the word “margin?” That is a factor many people miss. Your calculations MUST include a buffer of some sort.
I talked about this in a recent blog titled, “My Biggest Investment Mistake,” but too often people do not take into consideration unexpected expenses or unexpected things that limit income. As a result, it is not wise to assume 12 months of income on the rental property or assume the expenses you are currently thinking of as the only expenses you will have as a property owner. To help make your math more realistic, it would benefit you to not only subtract expenses from your estimated income, but to subtract even more to create a margin.
That said, if you are being conservative with your calculations and your “leftover” is a positive number that gets you excited, buying a real estate property for rental income could be a good idea. Even in a hot market.
Here is the reality: What makes a real estate investment a good idea has more to do with the specific property and your specific situation than the condition of the market.