Starting Out with High Home Prices

[Steven Wetherill]

Hey everyone,

My wife and I are in the early stages of purchasing our first rental property. We're kicking ourselves for not buying last summer before the home prices rose. The budget that would've gotten us a nice, turn-key property is now getting us some really run-down homes that require a lot of renovations.

I'm wondering if we should hold fast until the market calms down (if that actually happens) or if we should increase our budget to get the rental we want.

Will this housing market come back down or should we start adjusting to this new reality??

[Ronald Allen Barney]

For buy and hold the number to keep your eyes on is cash on cash return.  That number adjusts not solely by acquisition prices but by purchase prices relative to rental income potential.  In some areas rents are more than keeping up with home prices because people have to live somewhere, and a squeeze out homeowner market puts a similar squeeze on rentals.  In some other areas there is a different inventory situation and rents end up not keeping up with home sale prices.  Take a look at whatever is feasible for you to buy and then case by case, evaluate cash on cash return.  That will tell the true story of whether it's still a good time to buy in spite of the price increases, or not.