Think About 6 Things Before Buying Homes for Rent
Prices are low, rental demand is high, is this the time to begin buying homes for rent?
Buying homes for rent is one of the first steps that most real estate investors take.
How to rent my house is an important question once you make the rental home investment, but first, here are six things to consider before taking the plunge.
I think there are a few reasons for this:
- A home is something that budding real estate investors are most familiar with.
- As an investment, it’s fairly easy to manage. There’s one heating and cooling system, one tenant to deal with, and a minimal number of bills to pay.
- Financing or paying with cash is relatively easy compared to larger properties, or non-residential properties.
Recently I wrote about some of the pros and cons of buying homes compared to smaller multi-family properties and thought that smart real estate investors may want to begin thinking about purchasing residential homes for rent.
This recent article from one of the daily newsletters we subscribe to caught out eye:
High residential vacancies are killing many housing markets, as foreclosed homes sit on the market and depress sale prices and property values.
And it’s only getting worse: The national vacancy rate crept up to just over 13% according to last week’s decennial census report. That’s up from 12.1% in 2007.
The above excerpt about homes for rent is from the complete article at Yahoo Finance.
My article on multi family homes for rent discussed the difference between the exit strategies used when selling the portfolios, and on the property management differences between the two product types. If you know what type of property you’re most comfortable with, the next question is . . . .
With vacancy rates rising and prices going down, is this a good time to buy homes for rent?
The answer to that question will vary with each investor.
Here are 6 items to consider:
- Has the market bottomed out? Our favorite definition of a buyer’s market is when there are 10 properties for every 1 buyer. Please note, we never, ever, advocate trying to time the top or the bottom of any market.
- Investment strategy and Product types. What is the real reason for buying a property and what asset class matches your business skills & personality? I’ve written a lot about this, and strongly suggest that investors think this through before spending any money on investment real estate.
- CAP rate. What is projected for the property and are you satisfied with that return?
- Cash-on-Cash return. What is projected for the property and are you satisfied with that return?
- Capital reserves. No matter how many profit & loss variables an investor considers, some of them are going to be wrong. Market rents could significantly drop, competitors could flood the market, the economy could stagnate for years, property taxes could increase, and it could take much longer than expected for the house to rent. Is there money in the bank – the capital reserves – to cover these worst-case scenarios?
- Cash. Speaking of money in the bank, many experienced investors will pay cash for a property and seek to finance later. In a distressed market the ability to close quickly with few contingencies will lead to more deals being made at lower acquisition prices.
Buying homes for rent with cash.
I know this goes against the OPM (other people’s money) school of real estate investing. But speaking from personal experience, I sleep a lot better at night knowing there’s not a mortgage to pay or partners – a lender, for example – to deal with. Also, I hate paying interest. It’s still a cash expense, deductible or not.
In 2008 when the residential market first started going south my company worked with an investor who believed in timing the market and who decided to buy two homes for rent per week for the entire year.
We cautioned against this, advising the investor to instead buy two or three houses first, and rent and manage them as a test portfolio while at the same time watching the market for deals, picking and choosing additional homes for rent as investments.
The buyer declined and through various brokers plunged head first into the residential market, buying homes for rent left and right.
How this played out I don’t know.
What I do know is that the properties purchased have since decreased around 30% in market value since their 2008 purchase date.
Don’t throw caution to the wind when buying homes for rent
Lately I’m starting to see more and more investors with money to invest. My usual advice is to ask, “What’s the rush?”
Buyers are tempted by the lower cost per square foot relative to the boom period a few years ago, the currently strong demand in most rental markets, perhaps by the television advertorials about buying and flipping homes, and who knows what else.
Investors may have very solid reasons for buying, but my suggestion is to spend some time thinking about the six points I’ve written about before buying homes for rent.
If you’ve found this article on homes for rent useful, why not take a look at The 5 Step House Rental eBook training guide? It’s a risk-free investment and comes with a no-questions-asked, 100% money back guarantee.