As a real estate agent and investor, I also represent a number of investors who like to buy single family homes, mostly in Phoenix. We have been investing in Phoenix for several years. The days when we could buy very cheaply are gone, but we still find the occasional deal.
I was attending a wedding recently, in the midwest. Sitting in the back of the car, I was playing with the Zillow app on my droid phone, looking at what was for sale as we drove through various towns and hamlets. What I saw was initially encouraging. Homes in the area were selling cheaply. A 4 bedroom home of about 2,000 square feet, for less than 80,000. That sounded good, as Zillow was reporting the rents at more than 1,000 per month.
In Phoenix, we are used to buying in the 50,000-80,000 range and getting $800 a month in rent, more or less. And, our “rule of thumb” for maintenance, taxes, and insurance is that it will cost about two months of rent for these expenses, so we estimate a net income (outside of vacancies) of about 10 months of rent. See, in Phoenix we can insure a property for around $500 a year, and the taxes are between $500 and $700 a year.
Now if you live in the midwest, you are laughing, because the taxes on an $80,000 home are going to be upwards of TWO THOUSAND dollars a year, 3-4 times what they are in Phoenix. Wow. Now I know why people are leaving Illinois in droves, why property values are still falling, and why investors won’t touch the area. It will take 2 months just to pay the taxes!
The Phoenix market has come back faster than any other area in the country, and is currently still very hot. Inventory is low — hedge funds are in town buying everything they can get their hands on. The foreclosure auction, which has always been a fun place to buy homes, is like a retail store — no bargains there. Investors are buying homes sight unseen for more than they are worth. Where will this end? For the most part, I think it will slow down and get more reasonable, but I don’t think there will be any sort of backlash. Why? Because 95% of all the purchases by investors, are for cash. So there is no ensuing loan debacle.
Now, if Illinios, Iowa, and other areas of the midwest really wanted to revitalize the area, they might think about lowering the real estate taxes. Just a thought.