Breaking Down “Good” St. Louis Real Estate Investments
Let’s cut to the chase: whether you are looking St. Louis real estate investments in flipping, renting, or calling home, the quality of your investment comes down to net wealth vs. investment risk.
Net wealth is the collective value of all of your possessions, including your home and bank account. In St. Louis real estate investments, net wealth increases when you take less money out of your bank account than a property is worth. For example, if you use $119,000 to pay for a property worth $125,000, your net wealth has increased by $6,000. Sometimes, net wealth makes an immediate gain. Other times, your net wealth might gradually increase. For example, if you use $80,000 to pay for a property worth $80,000, your net worth has not increased. But, if you plan on renting that property for a net gain of $400/month, your net wealth will begin to increase by $400/month as soon as you find a tenant.
In an ideal world, net wealth would be all there is to consider about St. Louis real estate investments. Sadly, we do not live in that world. All St. Louis real estate investments come with a risk, and the quality of an investment hinges on its riskiness. For example you might buy a $5,000,000 mansion for $3,000,000. Apparently, your net wealth has increased. But let’s say that after paying $1,000,000 of your mortgage down, you lose your job and are unable to meet your payments. The bank is forced to foreclose on your property, and your net wealth takes a nosedive. You are now $1,000,000 dollars out.
While these principles are universal, a closer examination of different types of “good” St. Louis real estate investments is also helpful.
Investment properties
When you purchase a St. Louis property to rent or re-sale, you are purchasing an investment property. With investment properties, the return on your investment is part cash flow and part appreciation in value.
An example of cash flow: if your property rental income minus expenses produced $150/month ($1,800/year), and your invested cash equity was $50,000, that’s a return of 3.60% ($1,800/$50,000).
And then there’s value appreciation. When the real estate market booms or when you invest in renovations, the value of your home appreciates (increases). It is common for properties to appreciate in value by 1.00% or 2.00% per year. If your home is worth $50,000, in a year, it could be worth $51,000.
Generally, the best investment properties are “happy medium” properties. A fancy condo on the beach is going to come with a high purchasing price, which may prove difficult to recover. A fixer-upper in a rough neighborhood may seem like a steal, but you will end up sinking a lot of money into renovations and might have trouble finding a tenant to cover your losses.
Personal residences
Strictly from an investment position, the return on your personal residence is going to be purely value appreciation. Still, value appreciation can be a powerful force, especially if you pick a moderately priced property in an up-and-coming area and live there for an extended period of time.
As a general rule, if you are not planning to own a property for at least five years, your net wealth will not increase. Any appreciation in value will not compensate for the 8.0% to 10.0% transaction costs on buying and selling your property. Worse still, as a homeowner, you will have to cough up monthly expenses like property taxes, property insurance, and home owners’ association fees. If you don’t plan to own the property a long time, and the longer the better, you will probably do better renting and leaving the hassles and costs of ownership to a landlord.
From a financial perspective, the equation for “good” St. Louis real estate investments really is simple: choose a property with the best chance of increasing your long-term net wealth. Do your homework and crunch numbers for any property you are considering. You will likely be able to find a property that pleases your eyes and your pocket!