The Pros and Cons of Buying an Investment Property Now

NEW YORK (MainStreet) – For many people it makes more sense to rent a home than to buy one. Does that mean it’s a good time for an investor to pick up a rental property?

It could be, due to the rare combination of low housing prices and rising rents. Government surveys show that the only significant growth in housing construction is in multi-family units, which typically are rentals. So the pros clearly think this is where the profits will be. And in a recent podcast, two Wharton School professors suggested that rental housing is among the most appealing investments today.

On the other hand, investment properties have always had downsides as well. They are “concentrated investments,” meaning the owner puts a lot of eggs in one basket. They are “illiquid,” meaning you can’t get your money out quickly. And, of course, dealing with tenants can be a headache.

It’s also very difficult to figure out the investment prospects. Newcomers tend to focus on the purchase price, monthly expenses and projected rental income. But investment returns are also affected by complex tax issues such as depreciation and expense deductions. And long-term results can depend on price appreciation and the ability to raise rents – two figures that cannot be forecast with any certainty.

Given the risks of today’s housing market, with prices still declining in many areas, anyone purchasing an investment property would be wise to assume there will be no significant appreciation for the next few years. That makes a rental property a long-term bet, with success depending on rents exceeding expenses fairly soon. New owners of investment property typically have to expect to run in the red for several years.

As with all real estate, the value of a rental property investment is primarily governed by local conditions. One four-unit apartment house might be a good bet, while an identical one in another neighborhood could be a disaster.