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Will the stock market roller coaster drive real estate investment?

Over the last year and a half, it was hard to pick wrong in the stock market. The S&P 500 rose more than 25% in 2021 alone, and was also up double digits in 2020.

The market outlook for 2022 is far less certain. The February 1 headline in Marketwatch says it best, “As Fed sets stage for March rate hike, stock-market investors face ‘perilous’ backdrop of higher volatility.” 

As investors brace for increased volatility, they will likely look for other places to put their money. Investment property is the obvious choice. Here’s why: 

With stock market volatility looming, rental properties can be one of the best places to put your money

If you put your money in the stock market right before a correction, you’re in for an unpleasant surprise, to say the least. If you purchase an investment property in a city where rentals are constantly in high demand, like the Boston area, Dallas, Houston, or Atlanta, you will likely find yourself with much more stable investment returns. As long as you keep the unit rented, you’ll be able to wait out market uncertainty while receiving a consistent cash flow on your property. 

Investors will capitalize on low mortgage rates while they still can 

Even with the latest mortgage rate increases, there have been very few times in history when we’ve seen 30-year fixed mortgage rates hovering at slightly under 4% and 15-year mortgage rates slightly under 3%. Knowing that mortgage rates continuing to rise is all but certain in the coming months and years as The Fed raises interest rates, investors have a unique opportunity this spring to finance investment properties at affordable rates. 

Rents are going up

It’s no secret that rents are on the raise. Property investors are therefore seeing widening profit margins on their portfolios. Wages are going up, too. This means renters can afford to pay more rent. Investors who have fixed their cost of capital are going to see very nice net income as a result. For many investors, this is the main reason they turn to the rental property asset class in the first place. 

The double bottom line is unbeatable

While my first few reasons for predicting an increase in residential real estate investing have to do with current economic conditions, I’d argue that rental property ownership is more often than not an unbeatable long-term investment. Assuming that you own a property in an area where rentals are in high demand, you will have what I like to call the double bottom line advantage: the money you get from rent yielding a net profit each month, and your home’s value growth.

Consider the following scenario: You buy a home for $300,000, investing $60,000 of your money as a 20% down payment. In the first year, you get $1,800 per month in rent for the property. After paying the mortgage, plus taxes, maintenance and insurance, you conservatively clear $300 each month in net cash flow, or $3,600 for the year. This represents a 6% return on the $60,000 you put down. Still, there’s more.

Now, let’s say during this period, the rental property also increases in value by 4%, or $12,000. This represents a 20% return on the $60,000 you invested. You’re now looking at a $15,600 return (home value increase + total rent paid), representing a 26% return on your $60,000 down payment. That is a superior investment to almost any other you can find.

This example is overly simplified, but it does serve as an illustration of the double bottom line that you will see on any rental property. Assuming that you keep the unit occupied with tenants paying you rent, and you purchase a rental property in a neighborhood where home values tend to appreciate over time, you should see very strong returns.

David Friedman is the CEO and co-founder of Knox Financial.

This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.

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