How to Decide on an Investment Property
NEW YORK ( TheStreet) -- What type of investment property should you buy -- a condo or single-family home?
Until recently, that was a trick question, as real estate was too risky and illiquid for most investors. But growing evidence of a rebound in the housing market reduces the risk your investment property would lose value. Rising prices also improve your chances of selling without too long a wait if being a landlord doesn't suit you.
On Tuesday, S&P Dow Jones Indices reported that its S&P/Case-Shiller Home price Indices showed home prices gained 7.3% nationwide last year. Various other surveys have showed gains, but the Case-Shiller gauge is widely viewed as one of the most definitive, and it's a very healthy gain.
"As of the fourth quarter of 2012, average home prices across the United States are back at their autumn 2003 levels," the firm said. That's a good-news/bad-news statement: good because the market's improving, but also a reminder of how bad things were.
Low mortgage rates make homes very affordable at today's prices, and investors have become very active in many markets. If you've already decided you can live with the hassles of being a landlord , what type of property is best -- a single family home or condo?
To a large extent, that will depend on the individual market. In communities such as the Florida coast, there may be many more condos than single-family homes. In suburbs and rural areas, single-family homes dominate.
Rental rates on the two types of properties are a key issue. Investors generally assume it will take four or five years of rent increases for income to cover maintenance costs, taxes and other expenses. If there's a glut of condos or single-family homes, you may not be able to raise rents very fast, prolonging your time in the red. Of course, a glut also means home prices will not rise very fast. The ideal rental property is in high demand, allowing the owner to raise rents every year and assume that property values will rise at a good clip.
Generally, operating costs are easier to estimate on condos, because the exterior work is covered by your association fees. With a single-family home, costs for a new roof, landscaping and exterior painting could hit you out of the blue.
Another factor to consider: the type of renter likely to be drawn to your property. A recent survey by Premier Property Management Group, which manages 1,700 properties in 20 U.S. cities, found that renters of single-family homes are 18% more likely to stay in the home for five years or longer. Generally, that's good for the property owner, because each change in tenants can mean going a month or two without rent.