Do you remember all of those property gurus in the late 90s and early 2000s pushing endless schemes for making money in real estate? They gave rise to an entire industry of house flipping. Then came the housing crash. Now, nearly ten years after that crash, people are asking whether residential property is still a good investment or not. The answer depends on your goals and risk tolerance.
To demonstrate, we will focus on real estate in Salt Lake City. The greater SLC area is in the midst of an economic surge resulting in low unemployment, very good housing prices, and a huge increase in technology investments.
You might be considering the purchase of an SLC home for investment purposes. If your goal is to purchase your own primary residence that you hope to sell later on at a profit, your investment might not necessarily be a good one. Why? For an investment to prove truly profitable, you have to look beyond mere purchase and sale prices.
Total Cost of Ownership
Purchasing a residential property with a mortgage costs more than just what you pay for the sale price. There are also the costs associated with completing the transaction, maintenance and repair over the life of your ownership, and the interest on that mortgage.
Here’s an example: you take out a $250,000 mortgage at 4% for 30 years on an SLC home you are purchasing for $300,000. That means you’re putting down $50,000. When you add in your interest, insurance, and property tax (estimated at 1.25%) your total payment over 30 years would be in excess of $574,800. That does not take into account the money you put into maintenance and repairs. You would have to sell that house for double what you paid for it just to break even.
This is not to say you should not purchase a home. Buying has a lot of advantages over renting, including the opportunity to own something that you can do with as you please. Just do not fool yourself into thinking that selling a home for $350,000 after you purchased it for $300,000 means you made a profit. When you consider the total cost of ownership, you didn’t.
Flipping or Renting
If your goal is to purchase a home that will either be flipped or rented, you are talking about something completely different. Keep in mind that real estate in Salt Lake City is pretty desirable right now. It is certainly a sellers’ market, and that may determine how you use your purchase as an investment.
House flippers have to focus on low-priced properties that need some repair and upgrades before they can be sold. This works with a steady stream of low-cost houses, but it depends entirely on local housing prices continuing to increase. Purchasing a house and not getting in on the market before a cyclical decline could be costly.
All things considered, buying residential property that will be rented is the best way to use real estate as an investment. Provided the investor chooses the right properties at the right prices, those properties will provide annual cash flow. The successful investor can build a portfolio of properties that generates profits year after year until eventually selling the portfolio to fund retirement. It is a model that has worked for investors for decades.
Real estate in Salt Lake City is very desirable. It is desirable for the first-time home buyer looking to purchase that family home. It is also desirable for investors who know how to make money in property. In short, residential property is still a good investment for genuine investors.