(Author’s note: This is not a puff piece for the benefit of my city or my business. I am wearing my investor’s hat here reporting about what I’ve been seeing and what I believe in my gut is an opportune time for cash flow opportunities.)
Patrick Killelea, the indefatigable Captain of ultra-conservative but sound real estate investing, uses a simple algorithm to judge if a home’s a good buy or not — Comparing it to the cost of renting:
“Buying Safety Rule:
The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you’ll know it’s pretty safe to buy for yourself because then rent could cover the mortgage and ownership expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house:
annual rent / purchase price = 3% means do not buy, prices are too high
annual rent / purchase price = 6% means borderline
annual rent / purchase price = 9% means ok to buy, prices are reasonable“
It doesn’t require much effort to find one in Reno at 14%. Using the above formula: A $80,000 home can be rented out for $950 per month (it’s usually more than that). $950 multiply by a year is $11,400. $11,400 divided by twelve is 14%.
If you’re targeting commercial investments in Northern Nevada, I would warn you that it’s a tough sell right now — supply is outpacing demand by a high margin. Consumer confidence is low. Too risky:
“After hopeful signs of recovery, the Northern Nevada retail market is again showing signs of softness…the overall vacancy level in Reno/Sparks is 17.78%.
But rental market is actually improving the last six quarters and is at about what you could consider, average health:
“A quarterly apartment survey compiled by real estate appraisal firm Johnson Perkins and Associates shows that the overall vacancy rate in Reno and Sparks stood at5.64 percent in the first quarter of 2011. In the fourth quarter of 2010, the overall vacancy rate in the region stood at 7.16 percent. Johnson Perkins tracks 74 apartment complexes with 80 or more units.”
Northern Nevada’s real estate market is still on negative territory, albeit, ‘less negative’ now than two years ago. Is there going to be a double dip? I think it’s probable. But who cares, if your investments are catered to the majority of locals who can actually afford it (working in casinos, warehouses), in a market that is slowly improving — I think it’s a viable answer to the fundamental question of investing: How’s risk?
Start with foreclosure auctions, my good friend Dan went a few times to observe and informed me that there are about 3-5 serious investors in any given day of auction (backed with institutional money) but for the most part, it still is largely untapped.