Investing In Rental Property … Bubble Or No Bubble
There’s still a good buck to be made.
Despite the fact that we’re in the largest housing price bubble in history. And despite the fact that subprime lenders are losing their shirts thanks to a massive spike in foreclosures … you can still get into investing in rental properties with the right opportunity.
And that’s the key. The right opportunity.
We might be standing on a cliff face where housing prices are set to plummet anywhere from 10% to 40%. You can still get in now and do well. Again, you just need the right opportunity.
8 Rules For Creating The Opportunity
I know some solid and savvy property investors. This is not real-estate seminar BS. You can create the opportunity by sticking to some very smart rules that they use:
1. Get The Rent. You need a property where you can get 1% of the cost of the property in monthly rent. In other words, you need $2000 a month in rent from a $200,000 property. This is not easy to do, but the opportunities are out there. This percentage ensures you can pay the mortgage, the taxes, repairs, go through some vacant months, and even hire a property manager.
Don’t try and buy a property that’s renting for $1200 a month for $300k and think you can get a higher rent out of it. The rent is the rent. Renters can only afford so much. You need to get that property for $120k to get your 1%. And getting your 1% is non-negotiable. Stick to your guns and find the right property.
2. Test Drive It. When you find a property you like, advertise it for rent in the local paper. If you get a few calls from people wanting to rent it, scoop in and buy it up. Now it’s already pre-rented and you know the property is in a good area and the price is right.
3. Go Duplex. Ever wonder why there are so many condos these days? They have a small footprint and it’s a lot easier to find your 1% when you don’t have to add a back yard to the overall square footage and the cost. Other great opportunities exist in duplexes, four-plexes and houses zoned as “multiple dwellings” with upstairs and downstairs suites.
4. Get Ugly. Upscale neighborhoods are not filled with renters. Scratch that … actually there are some very nice neighborhoods where the owners rent out their basement suites. But if you’re going to buy an entire property in a really nice area, get the oldest, ugliest piece of shack you can find. Some cash and elbow grease will bump up the value, and so will the surrounding neighborhood.
5. Wall It Up. If you find a 2 or 3 or 4 bedroom property and the layout gives you ample room to divide up a family room or rec area, add another bedroom. This is one of the easiest ways to really add value to a property that allows you to get more rent for it. A nice new kitchen or bathroom isn’t going to do that like adding an extra bedroom will.
6. Inspect It. The last thing you want to do is buy a new roof on your new rental property. You’re looking for a great deal and you need to make sure it’s a great deal. In most places, people don’t need any qualifications to become a home inspector so find a good firm or an inspector with a solid background and credentials. Check the roof, the foundation, the plumbing, wiring. Check for pests like termites.
7. Outsource It. Being a landlord is not easy sometimes. You’re an investor, and that’s why hiring a property manager to find tenants, collect the rent, and deal with all the little problems can be a very smart expense. They charge anywhere from 5% to 10% of the gross monthly rent and take most of the hassle out of investing in property. This is also a great option if the best opportunity you can find is in the next town or in the next several towns over.
8. Go Long. Rather than getting a 30 year mortgage, look into getting a 40 year mortgage to reduce your monthly payments. Going long is not usually recommended for home owners. It adds considerable interest cost to the overall purchase price and your equity builds more slowly. But, you’re renting this property out. You’re not paying for it. If a 40 yr mortgage can put an extra hundred bucks cash into your jeans every month, it’s worth looking at, especially in an expensive market.
Summing It Up
The most important thing to remember is that a business has to be able to pay for itself. The property you invest in has to pay all the bills and then give you a profit every month. And at the same time you’re building up equity.
If you do it right, the hardest work you have to do is to find the right property. And to not settle for less than one that gives you your 1%. As long as the property can pay for itself, if market prices crash, you’re still getting paid, and in fact you’ll do better because as the worth of the property goes down, so do the property taxes.
The three things that can really hurt your investment are:
- Rental prices drop
- Interest rates rise
- A one horse town loses its one horse
What if rental prices dropped 25% or you go to renew your mortgage in 5 years and interest rates are up to 15%? Or the economy in the area takes a dive and people move away? These things have happened before. Take them into account. And if you can weather the storm you’ll be alright.
Bubble or no bubble, smart investing strategies work.