by Tim McLaughlin, Sr. Vice President, Weichert Financial
Equities and Fixed Income investments are delivering low (negative) returns, and home prices are at bargain levels. That has prompted a lot of would be investors to contemplate if the time is right consider buying investment properties for rental housing
As you would imagine, investing in real estate right now can be surprisingly profitable, if everything goes right. Rents are climbing in many areas, and more properties may be coming on the market. Last month, the Obama administration asked for proposals on how to convert some of Fannie Mae’s and Freddie Mac’s bulging inventories of foreclosed homes into affordable rentals.
Investors used to aim for rents that were 1% of the purchase price, or $1,000 a month for a $100,000 home, which equates to an annual gross return of 12%. Today in many areas, that has increased to 1.5% to 2%. However, average returns after taxes and expenses are more like 5% to 6% of the property value. But that is still well above what many other investments yield.
When investigating potential investment property purchases, avoid the following pitfalls:
- Confusing a cheap deal for a good deal – It is true that you can buy some homes for ridiculously low prices, but that doesn’t mean you can rent them out. Homes in deserted subdivisions aren’t appealing to renters or buyers in many cases. The same is true for less attractive properties or those in less desirable school districts.
- Forgetting that time is money – In real estate, time is not always on your side. You lose money when your property is empty, whether you are painting it or between tenants. Many times, you may be better off accepting a lower rent than waiting for a higher paying tenant.
- Assuming you will sit back and watch the rent roll in – When you become a landlord, you also become a rent collector. Just like homeowners who can’t pay the mortgage, tenants lose their jobs and stop paying the rent. Evicting them can sometimes take several weeks. There are extra steps such as upfront screening and pulling credit reports to see who is the “best credit risk” to rent your property, much like in mortgage lending.
- Knowing the area you are investing in – Is the town ripe for renters? Is it a commuter town that is more apt to have a high renter’s population? Does the town lend to a conducive renting environment. Don’t guess if it is or isn’t. Your knowledgeable Weichert Realtor can help with those questions and provide valuable insight to find the right investment.
- Financing your investment property… is often different then financing your own home. Weichert Financial can help you analyze the differences and make an educated decision. Ask us how!