As home prices fall and rents rise, some investors are plunking their money into real estate, chasing the cash flow that comes along with becoming a landlord. “For the first time in a long time, you can buy that home and can get a cash-on-cash return immediately,” said William King, director of valuation services for Veros Real Estate Solutions, a supplier of housing data to the country’s largest banks, as well as government organizations. “There are a lot of places in the country where an investor can buy a single-family home, rent it, and get a positive cash flow.”
In fact, investors bought 20% of all the homes sold in April, according to the National Association of Realtors. Some of them are buying with cash. But even if investors do finance part of the purchase, they’re able to turn around a profit much quicker than in the past.
In the past, investors would subsidize their monthly payments on a property with the rent they were able to collect, and the big payoff was the price appreciation he or she would accumulate, he said. Now, investors can come in with a 25% or 30% down payment, finance the rest, and the rent they collect often can cover the mortgage payment, taxes and insurance — with additional cash left over, he said.
“Investors are looking at these properties on a monthly income generating basis,” said Alex Villacorta, director of research & analytics at Clear Capital, a firm that provides data for real-estate asset valuation and risk assessment to financial services companies. “They can start to realize instant profit margins, even as the market goes down more.”
“There’s a turning point where the cost of owning a home is less than the cost of renting,” he said. “When that disparity grows … we will see a push from investors to pick up investment properties.”
In general, that investors are beginning to snap up rental properties is a good thing for the stabilization of housing markets, King said. It’s also one of the ways that a floor on real-estate prices can be established; as more investors spot opportunities in residential markets, prices could bottom.
“Once investors come into a community, you’re seeing the beginning of the end of the decline,” King said. What to look for
Before investing in a rental, make sure you’ve considered the realities of becoming a landlord. If you get the wrong tenants it can be a nightmare, but with the right tenants and the properties perform as expected, it can be an excellent way to make a buck.
Before considering any purchase, decide if you have it in you to be a landlord. You have to be willing to set expectations and consequences to ensure rents are paid on time, and you have to ready for the possibility of evicting non-paying tenant. Plus, you’re responsible for the upkeep of the property, no matter how your tenants treat it.
From there, it’s a numbers game. Get a sense of what rents are in the area you’re considering, the vacancy rate, and consider your costs of financing. Don’t forget the other costs of owning a property, including taxes and upkeep.
Some of the houses bought in the worst conditions ended up being the best investments if you are able to put some sweat equity into the homes before renting them out. It’s also important that investors have multiyear plans for the properties they buy, planning the financials at least 5 years into the future, he said.
Many investors sink their money into properties not far from where they live. Those are likely the communities they’re most familiar with, and from a management perspective, you’re never far from the tenants you’re dealing with.
But some markets are better than others to invest in right now.
A recent report from Inman News, an online real-estate industry publication, named the 10 best markets for home investors. These are markets with traits including high affordability, low prices, high share of foreclosure sales, high population growth, improving unemployment rate, and high return on investment in the next 10 years.
The following are their top 10 markets:
1. Indianapolis-Carmel, Ind.
2. Winchester, Va.-W.Va.
3. Gainesville, Fla.
4. Tucson, Ariz.
5. Tallahassee, Fla.
6. Hagerstown-Martinsburg, Md.-W.Va.
7. Salt Lake City
8. Richmond, Va.
9. Gainesville, Ga.
10. Winston-Salem, N.C.
Original article by Amy Hoak, MarketWatch