Can the purchase of a rental property compete in terms of returns with other investments?

We are looking at a property that is relatively new, in great shape, and has a rental history of about 8% of the asking price. With all scheduled expenses it appears that everything would be covered at this rental level. However, this rental level includes the "shoulder" months, or at least a lot of them.

The question we are struggling with is the amount of the unscheduled or non-routine expenses, such as replacing furniture, electronics, painting the inside/outside, etc. I would imagine these would eat into your revenue considerably.

Is it realistic to want a property such as this to be a pure investment? We live 7 hours away and would only be going there a couple of times per year so the "happiness" part of it would not be as great. Most people I have spoken with who own rental properties say it is not the investment they were hoping for but have resigned themselves to the concept that it is a lifestyle.

We aren't really looking for a lifestyle. Should we stay away from this type of an investment property? The price on the house is ok but not a steal and it is unpredictable what type of appreciation will occur in the next 5-10 years.

Any input from your experience would be appreciated.

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Rental Property
by: Dan

Thank you for your question. In the hey day prior to the housing bubble, the 8% may have been OK. Now, however, most people will not buy a property unless it is returning at least 11%. I know this, as I was just on the selling side and that is what the buyers were demanding.

In today's market, you probably could get good returns, but you are correct in saying that the shoulder weeks are not guaranteed. Let me ask a few questions: Does this house have a history of rented weeks in the shoulder season (Mar-May and Sep-Nov)? How many has it averaged over the past few years. Last year may not be a good indicator, because Hatteras Island was closed down because of Irene and people were forced north.

You are also correct in thinking about unexpected expenses. Think about your own home, then consider the fact that this is a RENTAL property. The care of your home will not be at the level you would expect.

I had always tried to drive my homes to breakeven, with the rationale being that you woudl make your money when you sell it. That did not happen because of the bubble. The fact that you are buying at or near the bottom puts you in much better shape. If you are looking from a PURE investment perspective, then this is a tough one. You will need to drive the return to 11%.

Just my thoughts.

Return on Investment
by: Andy

The simple answer is yes. Of course the first question would be what other vehicles are you considering? Right now 8-10% gross return is right in the wheel house of what to expect. Also appreciation of the property is a big factor according to location. There are a lot of variables to consider here and I hope you have a realtor looking after your best interests. The fact that you are asking this question makes me think you may not. If you need representation and would like to put all the numbers on the table feel free to contact me at 252-489-8819. My company handles sales, rentals and construction so you can see all aspects of ownership on the beach.

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