A frequently asked question on the internet is: “Is Lansing a good place to invest in real estate?” We’re going to answer that question in this article.
Given the Dolinski Group’s experience as a Lansing home investor, we buy houses company, and as a group of real estate agents, we thought it would be beneficial to share our insights and experience if you’re considering buying an investment property in Lansing.
In this post, we’ll cover different investment metrics, such as price-to-rent ratio, as we try to answer the question.
At the end of the day, the answer to the question comes down to the investment strategy you’re pursuing. We’re going to let you know which investment strategy we believe to be the best in Lansing and which are duds.
Let’s get started.
Basic Data For Analysis
Here is some basic data about the Lansing real estate investment market. The median home value in Lansing is $142,000 in 2022, according to Zillow.
The median gross rent in the area is $1,200 for a three-bedroom home. For a one-bedroom, the rent is $838. As for a two-bedroom, the rent is roughly $995.
We need these basic numbers to calculate some of the common real estate investor ratios.
Assuming a median home value of $142,000 at current 2022 and 2023 interest rates (around 7.5 percent) with 25 percent down, we can expect a median mortgage payment of $745.
Now, let’s dive into some of the investor ratios to see if Lansing is a good place to invest in real estate.
Lansing Price To Rent Ratio
A price-to-rent ratio provides a general ratio for when it is better to buy or rent. In the investment industry a price to rent ratio of 15 is considered good. Zero to 15 indicates that it is more favorable to buy rather than rent. Above 20 means that it is more favorable to rent rather than buy.
For investors, specifically, a zero to 15 price to rent ratio indicates housing is affordable, but rental demand may be soft. A high ratio means there is strong rental demand, however, houses are going to be expensive.
Given our numbers, Lansing’s price-to-rent ratio is 9.86. This is calculated by taking the median home value and dividing it by the yearly rental value.
$142,000 / $14,400
Some of the pros of Lansing’s investor price to rent ratio is the affordability of housing. If you’re a new real estate investor, this market provides opportunities to get started at lower costs.
When compared to cities like San Jose, California — a price to rent ratio in the 40’s — Lansing provides affordable real estate investment opportunities.
The cons of such a low price to rent ratio in Lansing is that rental demand is softer than areas with higher price to rent ratios.
Debt Service Cover Ratio
Another metric to evaluate, especially if you plan to take leverage against the property (ie debt), is the debt service cover ratio. This metric is influenced by more than the property and local real estate investor market and your specific debt vehicle must be considered.
However, this metric provides a rough estimate of cash flow potential and our ability to get higher returns on our equity when using leverage.
First, there are going to be several assumptions that have to be made when determining our net operating income if you’re looking at a property that has not been used as a rental.
Let’s assume the net operating income on your average three-bedroom single-family home is going to be roughly 55 percent. At an average Lansing rental rate of $1,200, this places our net operating income at $660.
Next, we have to take a look at our current loan costs and options. Assuming you put 25 percent down on a $142,000 home with a 7.625 percent interest rate, your mortgage payment would be $754 per month.
Calculating a debt to service cover ratio, this property would most likely have negative cash flow.
$660 / $754 = 0.88
To put yourself in the best position, Lansing real estate investors need to be above at least one to break even. Ideally, they should be higher.
I would add that based on experience, I anticipate market rental rates to adjust up to cover this additional cost that many investors are taking on.
A low DSCR isn’t a problem exclusive to the Lansing area. It is happening everywhere.
Some ways to make a higher DSCR possible is to buy down your rate with points, get a better discount on the property, and improve your net operating income.
As they say, real estate is about time in the market rather than timing the market.
Consider Your Investment Strategy
At the end of the day, whether or not Lansing is a good place to invest in real estate depends on your strategy and goals. The Dolinski Group believes there is opportunity in Lansing, but not every strategy is a solid one.
Fix and Flip
Are you looking for a quick, big cash payout? This strategy is still working in 2022 and 2023, however, there is more risk. That risk exists everywhere, however.
To make a fix and flip strategy work in Lansing, you must buy at the right price. If you are an investor out of state and unfamiliar with the area, it is critical to work with experienced real estate agents like the Dolinski Group.
A group of professional real estate agents will help you analyze property values and adjust numbers for market conditions. The biggest way to lose money on this strategy is to underestimate project costs.
If you’re out of state, it is critical to work with a real estate agent that has an understanding of estimating repair costs and adjusting them for current contractor rates. You will also need more professionals in your corner such as a Lansing home inspector.
Buy and Hold
Many of the numbers explored so far focused on using a buy and hold strategy. The article assumes you are looking to create rentals long-term.
This is the best strategy for investing in the Lansing real estate market. With a lower price to rent ration, housing is affordable and inexpensive.
Sure, interest rates are high at the moment, but inflation continues to rise and that is also increasing rental rates. The best way to make any real estate investment work is to hold onto it long-term.
Given current mortgage rates and market risks, I would recommend most Lansing real estate investors consider paying cash for their properties or putting a large amount down on the property.
It will lower your return on equity, but it will also decrease your risk factor. In the stock market, there is a function to calculate market-risk adjusted returns. It’s called a stock’s beta, where one is an average risk, above one is a higher risk, and below one is a lower risk.
Assume you could earn a 20 percent return on equity by leveraging the property with debt. However, the beta factor is two. Adjusting for risk, your rate of return is 10. If you pay cash, your return could be 12 percent.
These are just examples. You have to run your own numbers, but I want you to factor in current market volatility and risks into your analysis before you decide how to purchase the property.
As the adage goes in the real estate investor industry, “your money is made when you buy the house.”
Vacation Homes or AirBnb
Over the last five years, vacation and AirBnB rentals have boomed in various real estate markets. The strategy became highly viable in well-traveled, traffic metropolitan areas.
However, that’s not really the case in Lansing. From the numbers I have run, market demand and occupancy is low for vacation and AirBnB rentals.
I have evaluated various properties and just do not believe the numbers work out. Sure, there is some demand for vacation homes in the area. For example, people travel to go to the MSU game or travel for work as it relates to the state government.
Unfortunately, the demand does not appear high enough to make this investment strategy a cash flow positive one. It is much better to go with a buy and hold or fix and flip strategy.
Other Things To Consider
Lansing Rental License
The City of Lansing can get picky when it comes to your rental property meeting code. And that’s fair, so that tenants are safe and your liability is reduced by making necessary repairs and updates.
If you are buying a property that isn’t already licensed, you can expect to make quite a few repairs. After the property has been inspected, approved, and licensed, it is easy after that. Keep paying your fees and conduct your inspections as required to renew your rental license.
Lansing Real Estate Investors
If you’re looking to learn more about Lansing real estate investing, then there are some groups and clubs you can attend. For example, a notable group is the Lansing real estate investors club. They meet at various locations throughout Greater Lansing. These clubs provide more information to help you decide if Lansing is a good place to invest in real estate.
Alternatively, if you’re looking for Lansing real estate agents to become part of your team, reach out to us to see how we can help you.
If you are looking to acquire property, we can help you find it. We are also real estate investors and we buy houses. The Dolinski Group also sends out leads and deals to properties that do not meet our investment strategy.
Whether you’re buying a home for investment purposes or looking to move to Lansing. We can help.
