Curious why someone would buy an investment property right now? We asked one of our investors …
Q) Last month, you purchased a third home from Meridian. Given how high mortgage rates are – and with so much economic uncertainty – what made you pull the trigger?
A) I love podcasts, and recently heard an experienced investor say, “Don’t get caught up on the rate if the property cash flows. You can always refinance later.” It was a reminder that the rate I lock in will likely be the highest rate I ever pay, so if the numbers work now, the return will be even better when I refinance the loan down the road. I’m still working full time, and in the accumulation phase, so I can afford to take some risks. Based on the “steadiness” of the Memphis market, I also believe my principal will be well protected and my return on investment will outperform what I can get from a high-yield money market or CD.
Initially, I focused on homes within walking distance of the University of Memphis. It didn’t take long before I came across one that looked almost too good to be true. The list price was $160,000. The owner had made improvements, and it was tenanted for the next year. Monthly rent was $1,500 with a 2% bump if renewed. That’s a great cash-on-cash return. But then I started to consider the unknowns, and while I’m comfortable with market volatility, I do not like surprises. This home was built over 70 years ago, so there was a chance I’d have electrical, plumbing, or roof issues in the next ten years.
My other concern had to do with the lease agreement already in place. I reviewed it carefully, and then looked at comparable rentals in the vicinity. The rent seemed high for the area, though reasonable on a per-bedroom basis. Still, I wondered if I’d be able to get it again when the property turned over. I also wondered how well the tenants had been vetted, and whether the security deposit would be adequate to cover potential damages? Because I’m already a Meridian Property Management (MPM) client, I’m accustomed to a certain level of detail and quality. MPM’s leases are professional and comprehensive, and this made me a little uneasy.
I worked with Meridian to identify a new-construction property to compare to the home near the University. There was a home available with a tenant in place who had signed a two-year lease. Plus, I’d get the $250/month rent adder for my first three years of ownership and not have to pay a lease-up fee. I saw the opportunity as a win-win-win!
Next, I created two rudimentary spreadsheets. The first forecasted my income and investment growth over the next ten years, so I could better understand my financial situation. The second allowed me to compare the two homes. I included my purchase costs, mortgage rate, monthly income, anticipated expenses, and expected rent and home appreciation. While the difference in monthly cash flow was significant and favored the older home, when I looked at the total return ten years from now, the Meridian home provided a better overall return because I anticipate a higher rate of appreciation based on location. Before making my decision, I considered as many scenarios as I could and manipulated the numbers accordingly. In the end, I chose the Meridian home.
I’ve heard David Ramsey say there’s no such thing as passive investing. Sure, maybe that’s true in the literal sense, but my experience has been pretty close. I can’t say enough good things about the team at Meridian Property Management. For investors like me, who live out of state, work full time, have children, and don’t want to fix-and-flip or be a hands-on landlord, Meridian is a great choice.