Should you buy rental property in an expensive postcode?

2021 saw the number of postal codes double with a median selling price above $ 3 million compared to 2020. As house prices continue to rise, investors wonder if targeting more expensive areas is worthwhile. worth it.

Generally speaking, expensive real estate leads to higher rents, but this does not always equate to higher returns for real estate investors. Here’s a look at some of the more expensive areas in the country and how those pricey postcodes come across as a rental investment.

The most expensive real estate in the United States

California generally holds title to the most expensive real estate in the United States, with 38 of the 50 most expensive zip codes falling within its borders. New York ranks second, holding nine of the 50 postal codes. That leaves the other 13 zip codes scattered across the country, including several locations like Medina in Washington state; Gibson Island in Maryland; and Boston.

Image source: Getty Images.

The most expensive zip code in the United States is 94027, or Atherton, California. The second most expensive is Boston’s 02199, with an average price per square foot of $ 1,800. This exclusive neighborhood of skyscrapers just down the street from Boston Common makes the rest of the city look like a bargain. For the prospect, the nearby 02118 zip code in Boston is only an average of $ 1,100 per square foot.

Fisher Island, just off Miami, is in the same boat. The average price per square foot in this tiny oasis of 33,109 is $ 2,000, while real estate just across the cut in Miami Beach, or 33,139, costs around $ 577, or nearly a quarter of the price. .

Do rental properties make sense in these postal codes?

Let’s take a look at a real-time example of the potential costs versus rental income for one of these expensive zip codes. Postal code 02199 is the second most expensive market in 2021 and is made up mostly of high-end condos. The average sale price of a 1,500 square foot two bedroom, two bathroom condo is around $ 2.7 million. With a 20% down payment and a 30-year fixed-rate mortgage at 4%, the monthly mortgage payment will be a hair’s breadth above $ 10,312.

The average rent for a comparable condo is $ 6,454, which isn’t even enough to cover the mortgage. In addition to the $ 3,858 shortfall between rent and mortgage, the landlord would also be responsible for holding costs such as property taxes, rental insurance, property management, HOA fees, and repairs. Even as a vacation rental, it’s hard to sell considering the rental rates are $ 139 per night, or $ 4,170 per month at most. In this scenario, the only way for the rental property to generate positive cash flow is if it was bought in cash, offering an annualized return of 2%, a fairly meager return considering that the same $ 2 million could possibly receive double-digit returns on the stock markett with increased diversification.

When rentals in expensive areas make sense

It is one thing if the real estate you buy is to be visited once a year as vacation property or something that you intend to retire in. It creates a scenario where you look at personal desires more than numbers. If you have a legacy in one of these exclusive areas and are just looking to generate some passive income, it might then be wise to keep the rental property.

Likewise, if you are able to buy the property for cash or want to use a 1031 exchange to avoid capital gains taxes, it could make financial sense. Additionally, if you are looking to shift some of your wealth into real estate as a hedge against inflation, or if you anticipate significant appreciation, then this investment may make sense as well.

When rentals in expensive areas don’t make sense

For the majority of real estate investors, it is very likely that owning a rental in an expensive postcode will not pay off financially. If you must hold a large mortgage like in the above scenario, the holding costs will far exceed income. In most scenarios, he won’t even pay the mortgage, let alone make a profit.

The term “dear” is relative. What may seem expensive to one investor can be a good deal for another, depending on personal income and the markets in which the investor is currently operating. costs. That’s why it’s important to calculate the numbers for each area to help you understand when and where it might make sense to you.

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