July 21, 2008

A Newer Phoenix Investment House That Cash Flows?

Is it a good time to buy real estate in Phoenix for investment?

Surprise: The demographics are quite stable and strong and the data indicates population growth in the future. So keep the property for 10 years and you just might do pretty well with little risk.

–	Artur Ciesielski

A few day ago I was showing clients homes in Surprise. These were newer homes (2003-2007) in the range of 1,600 to 2,100 square feet. Most of the homes were well below $100 per square foot and many were below $80 per square foot.

We're talking about prices below replacement cost. That means it would cost more to built this house new and these were home maybe 2-4 years old at most in good areas and in very good to decent condition. It got me thinking as an investor.

I was amazed at how nice these home were; they are not luxury but good finishes some with granite counter-tops and the like with a good sized yards for $125,000 for 1,650 sf.

Could this be good investment? When you consider a property as an investment you take into consideration location, demographics and financing.

While this is a good deal and whom every buys is for occupancy will probably do very well. But as an investment you need to consider how will it make you money, what will be the return and what is the exit strategy and when.

This particular home is priced at $125,000 and the price can be negotiated down at least a bit the house needs about $5,000 to prepare it for rental and there will be some closing costs

Take a look at the APOD below.

$10,800	Gross Income
($1,340)	Taxes
($750)	Insurance
($250)	Accounting
($50)	Marketing
($900)	Management
($7,984)	Debt (PI)
($11,275)	Total Expenses

($475.00)	Net Operating Income

I did a rental survey of the area and found that properties can take up to 3 months of rent and the rental rate for this type of property is $875-$975 in the current market. Let's assume you'll get $900. This of course will rise in a few years once the inventory of homes decreases when the market improves.

Is it a good deal? Well there is a negative of $475.00 but your principal pay-down in the first year is $1,015 that put you $$540 ahead. In the second year the pay-down is $1,090 and $1,168 the 3rd year plus the rent will go up.

Surprise happens to be an area which is quite popular if not interesting and it will probably take while to recover but it will. The demographics are quite stable and strong and the data indicate strong population growth in the future.

So keep the property for 10 years and you just might do pretty well with little risk.

Oh, did I mention that you get depreciation, interest and expense write downs on your taxes. So depending on you tax situation the total return is very likely to increase bringing your accumulated wealth up.