Articles – Should You Invest in Rental Property?

by Roy E. Grimm, PhD

Here are two conference room scenarios that we find repeated on a regular basis:
A. A Baby Boom couple is seeking our help in purchasing a second home in Sedona that they intend to retire to five to seven years down the road. They want to buy now rather than waiting because they anticipate, correctly, that prices will be out of sight by then. To help defray costs, they’d like to rent out the home, at least on a part-time basis.
B. A savvy investor, having seen the value of her stock market holdings deteriorate or just go sideways, is looking into lower price range single-family-home rental properties as a stronger investment.

We explain to both sets of clients that the Sedona rental market is quite soft at the moment, thanks, in part, to significant numbers of people buying property with the same intent as they have. This has created such an excess supply of rentals that rents tend to relatively low compared to purchase costs. Someone using financing to buy rental properties in Sedona is not likely to achieve a positive cash flow. The economic rationale for such purchases is the expectation of substantial future appreciation combined with the significant tax benefits afforded by home ownership. Taken a step further into a Real Estate IRA or 1031 Exchange, tax savings can be dramatic.

If cash flow is of primary importance to the investor, though, we often suggest widening our search to the rest of the Verde Valley. In Cottonwood, Lake Montezuma, or Camp Verde, for example, home prices are less than half of what they are the in Sedona Area.

The other option for the second home buyer to is to consider the vacation rental market. We start, of course, with the caveat that City and County ordinances require a minimum rental period of thirty days in most of Sedona and the Village of Oak Creek. Even though the reality is that the requirement is not often enforced, it could be, especially if the rental is causing a nuisance in the neighborhood. The thirty day rule definitely limits the income that might be derived from a vacation rental. That market also appears to be somewhat saturated, particularly in the lower price range. Inspite of that, though, we have clients who own multiple vacation rentals and who are doing very well indeed, with high occupancy and above average rents. Their only complaint is that they don’t get to use their homes as much as they’d like because they’re booked so much. Although this appears to be an exception to the general trend, the vacation rental strategy can achieve the dual purposes of providing periodic personal use of a home and some income to partially cover expenses.