Admittedly, purchase prices are at an all-time high in the beautiful Flathead Valley. This has kept many prospective real estate investors and entrepreneurs on the sidelines. However, successful real estate investors evaluate more than just “purchase price” when analyzing a potential investment property. Below are some tips to help you navigate your real estate investment strategy moving forward to determine if now is a good time to buy an investment property.
The single most important measure to use when considering an investment property is CASH FLOW. While there are different approaches to evaluating cash flow, a good place to start is researching local rent rates for your desired type of property. You can utilize rental websites and rental advertisements to determine the market rate for your potential property. Once you have your estimate of monthly income, you next list out every expense for your targeted property. The list of expenses should include such items as taxes, insurance, maintenance, utilize, HOA fees, property management fees, mortgage payment, utilities, etc. If your estimated income from rents exceed your expenses, then you have positive cash flow!
A real estate investor must also anticipate how much a property’s value will increase over a particular period (the amount of time you anticipate owning the property). Appreciation will depend largely on the location of your specific market. For example, the Flathead Valley boasts Glacier National Park, Whitefish Mountain Ski Resort, Flathead Lake, and countless other tourist activities which draw 3-4 million visitors yearly to the area. To anticipate appreciation in the Flathead Valley, you can look at historic appreciation locally, as well as, historic appreciation in other places similarly situated (e.g. Jackson Hole, Vail, Big Sky, Aspen, etc.).
Many real estate investors are drawn to the proposition of leveraging a lender’s capital. The easiest way to illustrate this is by considering a scenario. If you have $10,000 and you want to make $3,000 – you need to achieve a 30% return on your $10,000. Obtaining a 30% return is rarely accomplished in any market for a sustained period of time. However, if you took the same $10,000 and “leveraged”/borrowed $90,000 and purchased a $100,000 house – you would only need a 3% appreciation to have made that same $3,000 profit (3% x $100,000). Realizing 3% appreciation is close to the national annual average and the Flathead Valley often far exceeds that amount of appreciation. Many savvy real estate investors use cash only, but there is no shortage of successful investors who used leverage to some extent while building wealth in real estate.
Without diving deep into tax law, depreciation is an important tool to understand when owning a rental property. Depreciation is essentially a yearly income tax deduction for a set amount of years depending on the type of rental property. While depreciation recapture does exist upon the sale of an investment property, understanding the present-versus-future value of money, as well as, utilizing a 1031 exchange – you can benefit as a real estate investor from depreciation in your tax planning.
Cash on Cash Return
Regardless of whether you buy an investment property outright with cash, or with a mortgage, you next evaluate your cash on cash return. After evaluating all the factors discussed above, you calculate your return for every dollar invested into the property. To do this, you can divide the Annual Net Cash Flow by Invested Equity. This is an analytical tool that assists in comparing investment options.
One additional, and somewhat intangible, benefit of real estate investing is diversification. While this concept is pretty straightforward, it can be summed up by the saying, “don’t keep all your eggs in one basket”. Real estate investing can provide a different asset classification in your portfolio and can provide you with an additional stream of income.
So, is now a good time to buy an investment property? The answer is “it depends”. It depends on whether or not the property you are considering has positive cash flow, is in good area for appreciation, and has a good cash on cash return. You must also consider the benefits of diversification and depreciation to your overall investment strategy. Even in the current market, there are countless real estate investors who are successfully purchasing cash flowing properties in the Flathead Valley. With that said, not every property for sale is a good investment. So while you need to be careful, do not make the mistake of solely looking at “purchase price” when evaluating real estate investment opportunities.
Are you interested in finding an investment property in Western Montana or the Flathead Valley? Curious what rentals are going for in Whitefish? Want to discuss the investment property market? Contact us – we’d love to talk.