One thing about real estate is that it is always shifting. That means that at any given time there is going to be one or more arenas where investing makes more sense than others. This is by no means an exhaustive list, and really only applies to today…but hopefully these thoughts will be of some worth.
With the incredible population growth that we are experiencing the question comes up all the time, where are we going to put everybody? Growth is a great problem to have and where there is a problem, there is the potential for making money if you can fix the problem. Here are my top 3 best investments…in no particular order.
Raw land/water rights
It is an age old strategy to buy land on the outskirts of a metro area and wait for growth to catch up to you. This has been proven successful time and time again, but there are a few things to know:
If you choose wisely you will look like a prophet/genius
The difference between valuable land and cheap land is huge!
You have to be prepared to play the ‘long game’
Taxes must be paid every year, so you usually invest a bit more every year
You will need water to finally develop the property
When you invest in raw land you have to be OK with the fact that it might be your grandchildren that finally get a benefit for your hard work. Predicting the growth of communities and the preferences of the public is a tough game to play. Even economists and ‘insiders’ commonly get growth patterns wrong. My observations have led me to believe that basically you just have to go with your gut and be prepared to be patient.
An advantage of buying land is that you can then begin to purchase water rights. In Utah if you do not use water you lose it, so you will need some land on which to deploy the water. You can lease the right to a city in the area as well, but htat is not nearly as much fun!
If you can assemble the capital necessary to purchase multi-unit apartments that cost more than $500,000 you can do quite well. Lower priced units are fiercely competitive so the investment returns get pushed down as the properties get bid up. If someone is going to live in one of the units themselves it makes sense to accept a very low investment return because you are basically just subsidizing your payment.
When you move into higher dollar properties you are no longer competing with the owner occupants so the return on investment is much better. This means that you can get real pre-tax returns of better than 6%. After tax returns are much higher depending on your tax bracket.
With small multi-units in the lower price ranges we discussed the element of a payment subsidy. This same principal applies to larger homes that are owner occupied and a small portion of the property is rented out. For example if you purchase a home for $500,000 that has a 2 bedroom basement apartment included and you rent that apartment out your effective house payment plummets!
Monthly Mortgage payment: $2800
Rental income from apartment: $1200
Effective payment: $1600
The amazing thing is that your effective payment is like owning a $300,000 home, but the $500,000 will be about 3-4 times the house than that smaller house you could have bought. Accessory apartments are a probably the very most lucrative investment for a home buyer to consider.