Wednesday, November 15, 2006

Rental Properties In Hard Times

Rental properties in hard times are a fantastic solution to a growing problem. As a market becomes a Buyer's Market, home prices begin to drop and even so, some people just aren't able to sell their houses.

I know a couple who is trying to sell their house in southern California and move to northern California, but their house has been on the market for two solid months and still nothing. Don't get me wrong, people come in and check it out. They must have had at least five open houses by now, but the owner keeps telling me that he will probably have to start renting it out. The same thing was happening to his next door neighbor and his neighbor decided to rent out the property and is now in a new house, while someone pays him good money to live in his own. I think my friend will wait another two months and if nothing happens, he'll put his property up for rent.

The Trouble With Renters

Trust me, renting out your property is not worry free. There are any number of things that can go wrong: plumbing leaks, stove malfunction, garbage disposal malfunction, property damage, etc. Yes, there are a lot more possible problems but this comes with anyone living in your house and using the house normally.

Sometimes it is impossible to find a renter. There will be a month, maybe even two where you won't have anyone to fill a vacancy and you will have to foot the bill yourself. It is important that you have enough money where this isn't a problem. The same goes for replacing appliances and having the plumber show up. You should be able to pay for these things.

Rest assured, you will get that call in the middle of the night that the toilet is backing up and you need a plumber, stat. Now I'm not necessarily saying that will be the topic; you may have very nice pipes and an uncloggable toilet. What I'm saying is that things happen and never on your schedule, so just be prepared.

Rental Management Companies

So because there are the pitfalls of an unfilled vacancy, payments that don't come in on time, having a fair rental payment for the home's value, unscreened residents and all the time it takes to actually manage a property, a place for Rental Management companies was born.

For a percentage of the annual lease amount (typically around 5-10%), you too can have the peace of mind that comes with having a management company.

These companies will do essentially everything there is to do, they will do:

  • Advertising
  • Rent collections
  • Tenant Screening
  • Eviction
  • Preparation of Vacancies
  • Maintenance
  • Accounting
  • 24-hour Paging
  • Lots more, depending on the agency.
Basically, after you hire these people, you can relax about the overall situation of renting but you can also kiss 10% of your money goodbye. In my mind, it's a small price to pay for the peace of mind they bring.

Renting For Profit

If you've decided to buy a rental property for profit, kudos to you. You may not be making much profit, but the point is that you're taking some crucial steps to financial independence.

Let's say you find a house for sale for $75,000.00 in a nice little neighborhood and decide to put a $10,000.00 down payment on it. On a 30 year loan at 6%, the monthly payment for the house would be around $400. Let's say property taxes come out to $100/mo. So your monthly payment would be somewhere around $500/mo, so just to be fair, let's hike that up to about $650/mo after all the fees are paid.

Now let's say you find a renter for around $700/mo (not a bad price for a whole house), and you take a nice deposit of $1400.00 (not to be spent, of course, but used as interest). So you're profiting $50/mo and your mortgage is getting paid off. Not bad.

Two years pass and you start getting offers for the house to sell at $85,000.00. Do you sell? Well, feel it out. If you honestly feel that the house is worth more, tough it out. Wait for the property value to go up some more. Even though your initial investment has doubled its value in only two years, it might be smarter to instead take out an equity loan.

What is an equity loan? Basically, you are borrowing money from the bank using your equity. So now that he house appraises at around $85,000.00 and you've paid your house down to roughly $49,400.00 using the renter's money, you would be able to take out a nice ~$30,000.00 loan. Now, you can pocket $15,000.00 of that (your initial down payment plus profit) and use the other $15,000.00 as a down payment on another property. Now you've made your money back and you still own the asset. Plus, you'll be gaining another asset with another renter with around the same monthly profit of around $50/house or $100/mo total profit.

You can repeat this process a number of times and make a killing. Your net worth will grow, plus you'll be re-investing the money you earn in a high yield savings account like INGDirect or HSBC where you get around 5% APY, so you'll be profiting in that way as well.

Before I close up, I'd like to take a second to recommend this eBook to you fine people. It's called How To Get A Home, Rent To Own and despite its webpage, it really is a good guide. So check it out and let me know what you think!

Please leave any questions or comments you have in the comments section, and tune in tomorrow for more on finance! Until then, hopefully you have no more problems with rental properties in hard times!

2 comments:

MortgageTop said...

Hello,

I recently published an article on mortgage loans, tips on how to make them work for you and other forms of mortgage financials – here is an excerpt from it, in case you are interested:

Smell a Good Deal for a Real Estate – Try to discover a property that has already got some equity in it, when you purchase it. Equity represents the value of a real estate, a property after you have paid any mortgage or other charges relating to it.

Try to Get a Second Mortgage on the Real Estate – You could try to be more creative and ask the seller whether he would be willing to have a second mortgage on that home. Thus you could set up an agreement with the seller through which you will have to pay monthly an approximate sum of $200, for instance, on $15,000 of the price of the real estate (plus or including the interest rate), for the second mortgage.

Save Some Money to Pay in Advance – Some lenders might give you a full credit if you come with at least a small percentage of the sum. This would grant you supplementary points for getting the credit and would also lower the interest rate – e key point of any mortgage refinance program.

Don’t Give up, Go Further – don’t trust the first broker who tells you that there is no hope for you. You will finally find someone who could offer a viable solution, just keep asking and searching. An alternative is to apply online to mortgage services. Thus your application would be seen by more lenders and you might get more offers to analyze your solvency.

Improve Your Present Credit Score – by not applying to credit cards, auto loans or other loans, if possible. Too many inquiries would also affect credit scores. Another important thing you should do to improve your credit scores is to acquit your current duties and payments on time.

If you feel this helps, please drop by my website for additional information, such as how to refinance a second mortgage or additional resources on mortgage rates.

Regards,

Michael

Liz said...

Being a landlord can be very hard!! There's a lot to deal with! Your post has been very helpful answering some questions I've had. The following website has a lot of good information as well http://www.e-personalfinance.com/article/10-Tips-for-Landlords.html