by Dan Krell
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People need a place to live. This is the mantra of many savvy real estate investors who are looking for fantastic buys on homes to use as rental properties. Real estate investors know that rental properties are looking better because markets are cyclical. Investors following the real estate market know that many people wanting to purchase a home prefer to rent during uncertain financial times.
The “MRIS Trends in Housing; Mid-Year 2008” (Metro Regional Information Systems Inc, MRIS.com) appears to confirm what real estate investors know. The report states that potential home buyers prefer to rent while timing “their entry into the market.” Interestingly, vacancies for traditional apartment complexes rose to 3.6% (from 2.9%) in the last year, indicating that renters are choosing to rent single family homes and condos rather than a traditional apartment. The report points to home sellers converting their “homes for sale” to “homes for rent” for the increase in apartment vacancies.
The MRIS report also states that rents increased 3.1% in the last year. Unlike the rental market of several years ago, where renters were negotiating leases way below list price, real estate investors are expecting to rent housing at a premium.
How much should you pay for a rental property? Savvy real estate investors typically do not want to pay any more than 70% of retail value for their rental properties; however many set their price tolerance lower. Consulting with a Realtor can assist your analysis in how much to offer for any home.
Let’s face it, if you intend to buy at bargain prices, you will probably be purchasing the home “as-is.” Seasoned investors will account for the cost repairs to bring the home up to code in their purchase price. Consulting with a licensed contractor can assist you in determining what repairs and updates are necessary.
Buying a home at the right price is only part of the equation. When considering a rental property, investors look for a home in a prime location. For example, having a rental near a metro stop can sometimes rent faster and for more money than an equivalent rental in a secluded neighborhood.
Some investors might say that the goal of buying a rental property is to have the home “pay for itself.” This means that the rent you collect should cover the home’s mortgage, taxes, insurance, maintenance and other expenses. Consulting with a Realtor and a rental management company can assist your neighborhood rent analysis.
Make no mistake, real estate investing is risky. Success as a real estate investor is not assured. From dealing with bad tenants to carrying a vacant rental property, every investor has a horror story.
Whether you are a seasoned or novice investor, you should always do your home work and consult professionals (such as your attorney, accountant, Realtor, financial advisor) to assist you in deciding if buying a rental property is right for you. Additionally your professional network can assist in determining your risk level as well as assisting you in creating your real estate investment plan. If you decide to become a real estate investor, maintaining communication with your professional network can help you anticipate and possibly overcome any bumps in the road toward your goals.
This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of October 6, 2008. Copyright © 2008 Dan Krell.