Do Not Buy Real Estate For Appreciation
February 27, 2015
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If you are a real estate investor or homeowner then you have enjoyed a long period of historically low interest rates. This will end soon. It is most likely that the next few years will see higher interest rates and depressed home values once again.

Higher interest rates will definitely have negative consequences on homeowners, who will see higher monthly payments as the affordability index for home ownership decreases.

But investors can still secure profitable property if they use a prudent formula.

  • First, do not buy property for its potential appreciation value! If the property does not have positive cash flow you are likely going to see a negative return on your investment as we enter a period of higher interest rates.
  • Second, only buy investment real estate where a 20 percent down payment yields positive cash flow of not less than 8 percent per year after expenses. This is a workable and prudent formula for successful real estate investing right now.

One area we are finding very attractive is storage unit facilities. With capitalization rates(2) on most real estate deals hovering at 6 percent and lower, at best we are finding cap rates over 8 percent in storage facilities and much higher for turnaround situations that are not managed well. This is an area we are closely investigating. We recently participated in one successful storage facility deal and have our eyes on another prospective investment.

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Mike Lathingee

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