Residential Investment

Investment Opportunities In Utah Real Estate

In the Utah real estate market, the worst seems to be over:  housing prices are stabilizing, buyer demand is increasing, and sellers are accepting the reality of the newly adjusted marketplace.  Unlike many areas of the country where a stable housing market is still years away, Utah’s real estate recovery seems to be closely following the general economic recovery.  With Utah housing prices now recovering from their recession lows, now is a good time to explore investment opportunities in Utah real estate.

Opportunities in Multi-Unit Housing

In our current housing market, I really like the idea of investing in multi-unit residential real estate: duplexes, triplexes, four-plexes, and small apartment buildings.  In order to reduce risk, I prefer smaller investments–$500,000 or less–and investments in diverse markets, targeting either different locations or different tenant types.  For example, I might recommend buying a triplex in the Avenues near the University of Utah, targeting the student population; a small apartment building near downtown Salt Lake City focusing on convenience-minded working professionals; and a home in Salt Lake’s unique Sugar House area that has been converted into a duplex.

Multi-unit housing has an advantage over single-family housing in that the total property rent is divided among several tenants instead of a single tenant.  In addition, in multi-unit housing, the rents can be significantly lower than in single-family housing.  Both of these factors serve to further diversify the investor’s risk by reducing the impact of vacancy and by increasing the pool of potential tenants.

Finally, demand for residential rentals in the Salt Lake Utah real estate market has remained strong despite the housing recession and rents have remained steady–both of which contribute to strong cash flow, which is the main reason for purchasing residential investment real estate. 

But, if the Utah residential rental market has not been seriously affected by the housing downturn, and if prices accurately reflect the value of the properties, where is the “opportunity” in residential investment real estate?  The opportunity can be found in two areas:  interest rates and vision.

Interest Rates And Multi-Unit Residential Investments

Interest rates are at all-time low levels making it more profitable than ever to invest in real estate.  There are two categories of interest rates for investment properties:  rates for properties with 4 or fewer units and rates for properties with more than 4 units.  If your Investment Property has 4 or fewer units, it qualifies for Conventional residential financing–the same financing that you would obtain if you were buying a home for yourself.  Anything above 4 units requires Commercial real estate financing.

Currently, Conventional loan rates are about 2% lower than Commercial loan rates.  What does this mean for you as an investor?  Opportunity.  Many duplexes, triplexes, and four-plexes in Salt Lake City are priced to provide a return closer to the Commercial financing rate of 7%, while Conventional loan rates are currently at 5%.  So, if an investor can borrower at 5% and purchase a property that returns 7%, the investor receives a built-in profit premium of 2%.   In addition, Conventional loans are often amortized over 30 years, which reduces your monthly payment and increases your cash flow versus the typical 15-20 year amortizaion used for Commercial loans.

Because of the interest rate and amortization differentials, significant investment opportunities can be found in 2, 3, and 4-unit residential properties, where the sales price has not yet been adjusted for the lower cost of Conventional financing.

Vision And Multi-Unit Residential Real Estate

Of course, there is always opportunity for investors who have the “vision” to see beyond the obvious value of a property and find additional value in the property’s potential.  This can include the vision to see that with better management, the property can provide better returns.  Or, the vision to see that due to a potential shift in the demographics of a neighborhood, property values can be expected to increase.  Or, the vision to see that with small changes to the condition or features of a property or to the way the property is marketed, untapped value can be obtained through higher rents.

Of course, “vision” investments can be risky and the potential for loss is great.  But if you have the ability to see a property’s untapped potential and then can capitalize on that vision, there are a lot of residential real estate investment opportunities uniquely available to you.

The Importance Of Sound Real Estate Advice

No one should rush into a real estate investment without a sound understanding of the both the risks and the opportunities of that investment, as well as a detailed financial analysis of the current and projected operations of the property.  If you’re thinking about investing in Salt Lake City real estate, please give me a call.  I will be happy to help you identify potential investment properties and assist in evaluating both the risks and the opportunities of properties, before you invest.  There’s no better time than now.  Call today!

About the Author

For information on Salt Lake City, UT Real Estate, contact Ronald Ogden, your Utah Real Estate expert, at DwellUtah.com

Rob from Brooklyn on Residential vs. Commercial Investments

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