I started to write this post almost a year ago back in March of 2025 but never got around to writing the full post. I have been wanting to add another property to my rental portfolio but the market has been insane. I haven’t really written about real estate now in years because unless you already had some rental properties, it didn’t make any sense to buy.
There are three ways to value a property:
- The price anyone is willing to pay. In California, people pay over $1 million for a shack while that same shack in another state or country can be bought for under $20k.
- The cost of the land, materials and labor. Unless you buy your own land, build your own house you’ll rarely get this price of a home, usually you also pay a significant margin to a homebuilder to move in to a ready built home.
- The amount of rental income you can generate from buying and renting the property. As a general rule of thumb, 1% rental income is a fair value so if you buy a home for $300,000 then you should be able to rent it for $3000/month.
I generally don’t do #1 or #2 when looking for rental property, that leaves #3 which is the income a home can produce. In 2023, I went looking for condos to buy in Austin, TX. Boy, what a bubble that city was in because most 2 bedroom, 2 bath condos were selling for $500,000. The ROI with best case scenario was negative. Today the same condos are $100,000 cheaper but the rents are still only around $2600 which still leaves a huge deficit and negative ROI.
The good news is that prices continue to fall and there have been so many new apartments, houses, and condos built in Austin that price are going to fall harder. Toward the end of this year or early next year, it may be a good time to get back into rentals. Unfortunately, if insurance, property taxes and maintenance expenses continue to climb, I won’t be buying until inflation is under control.
So far my rental business is doing great, aside from the growing expenses for insurance and maintenance it brings in the cash. I’ve successfully raised rents and not had any tenants leave for the past few years.
Ironically, I got into the whole rental business as a tax shelter and it’s been working great which is why I’d like to buy another home.
It does seem like we’re finally heading into a recession of some sort. AI is starting to eat the world as software and big tech companies stocks are getting clobbered in the market and employees getting laid off every quarter.
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Are you ready to buy a home in 2026?