Entering buy and hold market right now

[Ying Gong]

San Diego housing price is at and above pre-recession level.  I am wondering whether the timing is not right to enter market for buying and holding (for rent) when positive cash flow seems generally challenging.  It seems to be risky to expect further rise in property value as objective.  I like to hear some thought on this.

[Ricardo R.]

Ying Gong, I too see a prices rising and inventory low. I guess as something to keep in mind, housing appreciation usually occurs at 3% per year as an average nationwide. Of course some areas are much higher others lower and some years you'll see a negative others you'll be positive in relation to appreciation but on the average you'll see appreciation at 3% per year when its all said and done. With that said.....

Don't count on market appreciation... Instead, if you want to get in right now... make sure the numbers work, i.e. cashflow, ROI etc. now. Ask yourself 'If my purchase price was my house value and it never went up again, would this investment still make sense?' .... In my opinion if you are cashflow positive and you're ROI is more than what you could get in traditional investments i.e. funds, stockmarket, etc. then, yes it is. I would just ensure that you have built in buffers, for instance, make sure 1) your cashflow is sufficient enough, for example, if you only cashflow $100 a month, well that doesn't leave you enough room if your numbers don't workout later down the road; what if rent rates drop? or taxes increase?....2) build in other buffers, for example, I personally include water $50/mo. in my numbers... so if for instance rent rates decrease in my area or taxes increase or any other number things, I can drop water and have the tenant pay for such in future listings. Essentially I've built in a $50 buffer before it even affects my cashflow - as it would remain the same - don't forget to include your CAPEX, maintenance and vacancy buffers as well. 3) Don't count on market appreciation - it'll probably be there, but don't count it for the investment to make sense, instead try to look for forced appreciation, such as, can you add another legal bedroom? or something of the sort? (your home value will increase, as well as what you can charge for rent), can you rehab the rental a bit and demand higher rent?

In the end market appreciation will only affect you if you 1) are trying to sell during a down turn or 2) are trying to refinance... if you don't plan on either of those or you're not pressed for those because you've built in enough buffers to cashflow well, even through tough times - then you're only concern is whether or not market conditions will affect rental rates... which is something you can reasonably control through built in buffers such as those above. Just my ten cents....

I hope this helps. 

Alex