Not a Good Time to Invest in Real Estate

The Government is looking to rent out its surplus of foreclosed properties, according to an August 11^th, 2011 article in the New York Times.  This is a great way for the Government to generate income on liabilities that are currently sitting vacant, but this could prove extremely dangerous to real estate investors.

The Obama Administration states that the proposed solution will stabilize the market value of homes, however many real estate investors are no longer in the real estate market for capital gains (increases in home value).  Instead investors are after the steady income generated through rental properties.  The problem is the government will be able to undercut the local rental prices in the name of providing “affordable housing.”

When determining whether a property is a good investment you need to calculate if your property will produce positive cash flow according to Robert Kiyosaki, real estate investor and bestselling author of Rich Dad Poor Dad.  The involvement of the Government will alter the average rental price thereby lowering the cash flow and turning investments that were once good into potential money pits.

Let’s use a hypothetical situation to demonstrate the problem.  Let’s say you purchase a $100,000 3 bedroom 2 bath rental house with 30% down ($30,000) at 5% interest, and a 1.25% tax rate.  The mortgage payment would be $641 per month (http://www.mortgagecalculator.org/).  Let’s say you can rent this home out for $900 a month.  That means our positive cash flow would be $259 per month, which adds up to $3108 per year on our initial investment of $30,000.  This is over a 10% annual return and would be considered positive cash flow.

Now let’s throw the Government into the mix.  The Government is currently making no money on their foreclosed houses so any money they can get for rent is better than nothing.  In our example the Government rents out the same 3/2 house for $600 per month.  With many of these houses available it drives the average rental prices down in the area.  Now you can only charge $600 per month for your rental house as well, but the mortgage is still $641 per month.  Your cash flow is now -$41 per month, and your rental house is costing you $492 per year.

In a time when there really are no solid investments out there, real estate was one of the only games left in town.  With the possible scenario being put into effect, I would hold off on buying a rental property.

Sources:
http://www.nytimes.com/2011/08/11/business/us-seeks-to-rent-out-its-foreclosures.html