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Real estate prices are tumbling across the U.S. That may spell trouble for homeowners, but it may be good news for interested buyers or investors. You can get much better deals today whether you are looking to rent a single family home or small residential property.
“Now is not the time to buy and flip properties for quick capital gains, but it is a good time to get value property below the inflated prices that used be two years ago,” says Walt Clark, president and CEO at Clark Capital Financial L.L.C., in Columbia, Maryland.
Finding a profitable rental property takes research and resources. Not every cut-price property will be a winner, and not everyone is cut out to be a landlord. There are plenty reports of rental properties going into foreclosures due to the owner’s inability to continue paying the mortgage.
Real estate gurus say that those who do have what it takes may find rentals to be a good way to build wealth. Here’s how to shift the odds in your favor:
1. Set goals. You can bank on your rental property appreciating in 10 years, but in three to five years you could see it loose value, Clark cautions. At the same rate, the longer you own the property, the more you will need to plan on investing in maintenance, repairs, improvements, and unexpected vacancies. Even though rental income can supplement your savings, it pays to have a substantial cash reserve after buying a rental property. Clark says the cardinal rule is to have 10% reserve capital for an older unit, less for newer properties.
2. Find the best location. When you’re buying rental property, invest in a neighborhood where people want to live. Churches, parks, and schools are good tell-tell signs, as are amenities such as access to large department stores and chains such as Wal-Mart, notes Clark, who owns primary residences and rental properties in Florida and Maryland. New housing development is another factor. If you see houses boarded up or many for-sale signs, you may find it difficult to attract tenants who’ll pay ample rents.
3. Network to find good deals. Talk to other owners to find out about properties selling at low prices. Consider
joining a local landlord or property owner’s association to help make contacts. In many areas, you can join such a group even though you don’t own rental property yet, notes Wallace Gibson, who heads a property management company in Charlottesville, Virginia.4. Kick the bricks. “Use the same criteria [buying rental property] as you would when buying a house for your own residence,” says Damon Dyas, a certified financial planner with Ameriprise Financial in Southfield, Michigan. Have an inspector determine if the building is structurally sound, he adds. Once you get the inspector’s results, factor those findings into your financial forecast. Problems such as peeling paint can be corrected fairly easily, but a need to replace the heating system could wreck your budget.
5. Know what the market bears. Don’t overpay for a property. Know what the market and neighborhood will bear in terms of rental income. The type of property, number of units, and the loan amount are dictating fac
tors. Ideally, you want rental income to cover the mortgage payment, taxes, insurance, and maintenance. For example, if you pay $200,000 for rental property, then expect to get at least 1% or $2,000 in monthly rent, Dyas says.6. Line up your financing. Expect to face scrutiny when you apply for a loan these days. “Eligibility requirements are tightening,” says Jerry Miccolis, a senior financial advisor at Brinton Eaton Associates, a financial planning firm in Morristown, New Jersey. Even though lenders are cautious, financing for investment property is still available if your track record is good and the property pencils out in terms of current or projected income, Gibson says. “Some investors use a home equity line of credit on their own home to finance a purchase of rental property,” Gibson says. “Others borrow from their 401(k). If rental income grows, they may be able to refinance from a lender and purchase more rental property.”
7. Set management responsibilities. You might hire a property management company to deal with tenants and handle maintenance. However, as much as 10% of your rental income will go to the manager, reducing your prospects for profitability. If you decide to manage the property yourself, be prepared to devote substantial amounts of time and effort to the venture,
Gibson says. Unless you’re extraordinarily handy and live nearby, you’ll want to line up a plumber, electrician, heating/air conditioning specialist, and so forth, to deal with problems that arise.8. Be realistic about rents. Know what similar properties in the neighborhood are renting for in order to project your income from the property. “Joining the local landlords association can help you get a good idea of how much to charge,” Gibson says.
9. Screen tenants selectively. Don’t accept the first person to apply just to get some money in your pockets. Once you have problem tenants in place, dislodging them can be an agonizing experience. Consider using a tenant screening service such as AmerUSA Tenant Check Service (www.amerusatenantcheck.com). To protect yourself, you’ll need a legally binding application form and lease agreement. Also, consider getting landlord insurance to cover unforeseen expenses such as tenant rent defaults or property damage.
10. Utilize resources online. Check out the Websites of such groups as the National Real Estate Investors Association (www.nationalreia.com), the National Association of Realtors (www.realtor.com) and National Association of Rental Property Managers (www.narpm.org).