Real Estate Investing in Rental Properties
Posted by Craig
May 27th, 2008
Rentals
There are many ways in which a person can make a living when it comes to real estate investing some of them carry more risks than others. It goes without saying that those that carry the greatest risks are often the very real estate investment methods with the highest potential profit but slow and steady, in many cases, wins the race. Flipping houses is in the news a lot because so many fortunes have been made doing this-more than a few have been lost in this venture as well but those don’t make the news nearly as often.
Working with rental properties isn’t nearly as glamorous and doesn’t provide the almost instant profits that flipping houses might but it is also a great and very valid method of real estate investing that will build a steady profit over time if you plan properly. Rental properties are in demand now more than ever with so many people going into foreclosure and losing the homes they’ve worked hard to build for their families. For this reason rental properties are a good thing to own at the moment, especially those that are family homes.
There are many reasons that people rent and while there are some risks involved when renting properties, the risks are much lower than the risks involved in flipping or pre-construction investment endeavors. There are a few things you should consider when purchasing a property for the sake of renting however in order to make a wise and long lasting decision for your real estate investment.
First, only invest in rental properties in areas that people want to live in. It may be true that you can buy property cheap in a few very run down sections of town but it is doubtful that you will turn those properties into profitable rental units. It is best to pay a little more for a more attractive address for renters. You will find that your properties are inhabited more often, which will make you more money in the long run.
Second, pay attention to the types of people in the area and buy rentals accordingly. It is quite possible to turn large homes into multiple smaller apartment units (according to local zoning laws) that are ideal for college students. You do not want to do this however in an area that is geared towards family homes and won’t be friendly or tolerant of college students. Design the rentals according to the market you are attempting to attract.
Third, don’t be greedy. The goal of owning rental properties is of course, to make money. At the same time if your price your properties too high you will find that they sit empty more often than not. Every month that your property is empty is a month that you aren’t making money on that property at best and a month that you are losing money at worst.
Fourth, know the market. Study the local market for buying real estate and renting real estate. This will help with many things, not the least of which is determining whether or not any given property will make an attractive rental unit. Another thing it will help you determine is how much rent the units you are considering can bring in month after month.
Finally, when renting properties you need to keep your eye on the long-term goals rather than shortsighted goals. Property rental is a marathon rather than a sprint with the greatest profits coming at the end. You will want to pay as little interest on the property as possible and pay the property off as quickly as possible in order to realize the maximum profit potential and acquire new properties. The real money when renting properties as a real estate investment isn’t in renting out one or two units but twenty or thirty. The more rental properties you own the more money you stand to make from owning them.
Personally I think the market for being a rental investor right now is better than it has been in previous years (at least in my region) because home prices are slightly lower, foreclosures are at their highest ever so it’s possible to get some GREAT deals and since mortgages are harder to get there are naturally more people being forced to rent. It’s good to remind us of this
Posted on May 28th, 2008 at 3:07 am
This is really great advice for new investors and a great reminder for the seasoned ones. The rental market will only gain momentum until the foreclosure fall-out finally plateaus.
How do you see investors having to accommodate for this type of market though? Do you think that renters with damaged credit from a foreclosure are worthy credit risks? My husband and I have invested before and I think because I’ve seen in go both ways I would still be leary of renting one of my properties to someone that had a recent foreclosure on the credit history. How do you feel about it as an investor?
Posted on May 28th, 2008 at 4:34 pm
great post. i totally agree that investing on real estates would be profitable. but, it also needs some expertise on the subject.
Posted on May 30th, 2008 at 7:26 am
I am more of the slow and steady type myself, though the one thing to consider before investing into a rental property is do I have the time and patience to make it work?
Posted on June 2nd, 2008 at 2:20 am
IMHO while worlds economic crisis real estate investments is very risky. besides you can get hoge profit
Posted on June 11th, 2008 at 2:28 pm
Great advice, Craig. One of the additional issues with Florida real estate right now, at least the Central Florida areas that my company operates in, is that rental rates have in many cases not kept pace with construction costs / property prices (even with property prices falling in the last year). So it’s vital that investors limit any purchase offers that they make are to a level that reflects rental economics, regardless of the seller’s valuation. In the current buyers market, that’s a hard reality for many sellers to accept.
Posted on June 15th, 2008 at 8:45 pm
Apologies for the poor editing - that should read ” . . . offers that they make to a . . . ” of course.
Posted on June 15th, 2008 at 8:48 pm
When you are thinking about renting - act sooner rather than later when approaching a rental company to market your property. Give them a good chance of getting a tentant with plety of notice of your intentions!
Posted on July 7th, 2008 at 6:28 pm
Here in Turkey foreigner like to invest in rentals. Holiday rentals are very high here. But! Foreigners dont know with area is really popular and some cheaters sell them houses, which nobody will rent may be. Be careful, you must know the area very well.
Second tip: if you stay in another country you will have to trust some management company for holding keys. Some cheaters rent out houses and owner even dont know about it. Be careful if you want to invest abroad.
Preferably to invest if your friends already do it and are happy with earnings.
Posted on July 8th, 2008 at 4:11 pm
There is no question that the rental market is good right now. The problem is what the sustainable 5 year rental rates are. With people losing jobs, and new jobs offering less salary, it is scary to think what COULD happen.
Posted on July 14th, 2008 at 11:04 pm
I have owned many rental properties over the years. They can generate reasonable rates of return and they offer some valid tax benefits. They also offer lots of issues that must be handled.. It really depends on what your situation is.
Posted on July 15th, 2008 at 9:51 am
Investment property has some pitfalls, but it is still the best way I have found to build wealth. Thanks for posting this.
Posted on July 18th, 2008 at 5:42 pm
Long term goals with the end in mind is always important, great informative post.
Posted on July 22nd, 2008 at 4:57 am
The current market makes buying rentals an idea investment. Many people can’t get mortgages that would have bought in the past which is increasing the demand for rental homes. Added to that is most US markets condo conversions have removed a large percentage of available rentals there is a large shortage of rental properties. This is causing rental rates to increase. Low vacancy rates coupled with higher rents makes owning a rental property more profitable then in the resent past.
Posted on July 22nd, 2008 at 6:25 pm
I have been an agent and investing for 6 years+ and I can tell you that one mistake many make is they don’t buy cashflowing properties and think very long term. You need the cash flow as a cushion and you need it to pay for repairs. Vacancy is a killer also.
Posted on July 25th, 2008 at 5:31 am