Housing market inviting to investors
Low mortgage rates have made buying a home more affordable and turned rentals into an attractive option for investors across the country.
The housing bubble and bust did not happen in Pittsburgh. But throughout the downturn in the national housing market, average investors pooled their money to buy foreclosures at a sharp discount and turned them into rentals. Many homeowners unable to sell for a good price have purchased a second home and rented out their first property.
Although the housing market is showing signs of recovery, demand for rental housing is expected to remain strong. The national unemployment rate remains high at 7.9 percent, banks are still working through a backlog of foreclosures and tight lending requirements prevent many renters from becoming homeowners.
And the Fed has said it will keep its short-term interest rate, the federal funds rate, at a record low until unemployment falls below 6.5 percent, something many economists don't expect to happen until late 2015 at the earliest.
“In this market, at this point, it's a sweet spot,” says Chris Princis, a senior executive at financial advisory firm Brook-Hollow Financial and owner of two rental properties in Chicago. “You're getting the market where it's just starting to rebound, but still at the bottom, with what's looking to be a great recovery.”
Here are tips for those looking to invest in rental property:
• Understand what it means to be a landlord
If you elect to buy a property for the long-term investment potential, the goal should be to ensure that the rental income covers the cost of your mortgage and monthly maintenance costs.
“Real estate is a great investment if people are paying their rent,” says Princis. “If they're not paying their rent, it's a horrible investment.”
• Buy in an area with a history of strong rental demand
Neighborhoods near universities are a good option. For homes in residential areas, proximity to schools can be a good draw for families.
Condominiums and similar properties in communities with a homeowners' association can be a great option because the association arranges for upkeep on the property.
But check the fine print on your mortgage and homeowners' association rules to make sure turning your property into a rental isn't forbidden.
Foreclosure tracker RealtyTrac Inc. recently ranked metro areas, with a population of 500,000 or more, according to the supply of available foreclosures for sale and their discount versus other homes, among other criteria. Among the top 20 cities deemed the best places to buy: Miami, Chicago, Philadelphia, El Paso, Texas; and Poughkeepsie, N.Y.
• Consider a using a management firm
Determine whether you want to select the tenant and handle property issues or hire a company to do it. If you take on the responsibility, you are obliged to fix any problems (leaky faucets, broken furnace, etc.).
“Are you prepared to do all of this on your weekends or evenings or get calls while you're at work because a pipe burst and it's flooding?” asks Jim Warren, chief marketing officer for property management company FirstService Residential Realty
• Do the math
Although prevailing rental prices will go a long way toward determining what you can charge, getting the best return on your investment starts with making sure you're going to get enough rent to, ideally, cover expenses and costs.
Princis' formula is charging 15 percent above monthly mortgage and maintenance costs. So if those costs total $1,000, he'll look to charge $1,150.
• Screen tenants thoroughly
Once your rental starts drawing inquiries, it pays off to screen prospective tenants by asking for landlord references and running a credit and a criminal records check.
Experts also recommend asking for a deposit equal to one month's rent, plus extra if the tenant has pets. That will help cover any damage to the property and protect you if a tenant moves without paying rent.
Also, have a walkthrough of the unit with the tenant and ask that they sign off on the condition of the property before they move in. That will help avoid conflicts over the security deposit if there are damages when they're ready to move out.
• Get familiar with landlord laws
Two good resources for rental rules are the U.S. Department of Housing and Urban Development's website (www.hud.gov), and The Landlord Protection Agency (www.thelpa.com), which includes state-specific rental guidelines and standardized forms for rental agreements.