After the real estate bubble burst in 2007, and property values in most areas of the country collapsed, many investors soured on real estate. But rental markets remained strong, thanks to all those people who needed places to live after they had given their homes back to the banks. In some areas, you were able to buy solid properties at prices from the 1960s while rents stayed at their modern prices or even went higher.
Most of these properties had strong positive cash flow, which made them solid deals just based on the rent-to-value ratio. Imagine buying homes in the suburbs of Detroit for $35,000 to $50,000 while renting them out for $850 to $1,000 per month. You could also buy homes or condominiums in Florida, Arizona, Nevada and Texas for prices not seen in decades. It was a bonanza if you had guts, access to cash and someone local to run the properties.
After several years of decline and stagnation, many areas of the country have experienced double-digit rebounds over the last few years, but there are still some great opportunities in to create your own cash flow machines. According to ABC News, the top five markets to own investment property are Detroit, Chicago, Houston, Minneapolis-St. Paul and Boston.
The rent-to-value ratio is king, in my opinion; the prospect of having nice appreciation in your resale value is strictly secondary. Remember, buying a rental property is about cash flow, not speculation about growth. To successfully invest in rental real estate, adhere to these rules:
- The three most important things in real estate are not location, location, location; they’re cash flow, cash flow and profit. That location mantra? It’s for homeowners raising families, not for investors.
- Location is still important because quality tenants will gravitate toward quality homes in solid blue-collar areas. Buy where the tenants you want, want to be.
- Buy properties only in areas where a significant percentage of the homes are owner-occupied.
- Make sure the property is in good repair and is clean to attract the best tenants. You (or your management company) pick the tenant. Quality tenants will fight over solid homes in nice areas.
- Complete background checks are mandatory — not just credit checks. Just because someone has had a one-time financial bump that led to a foreclosure doesn’t mean they won’t be a solid tenant. Judge people by their overall background, not just by a credit score.
- Offer small discounts on the rent for timely payment and enforce late fees. Set the tone early and often. Be fair, but firm.
- Don’t over-leverage your investments. Doing so puts your empire at risk of crumbling during the next real estate downturn. Many investors are paying cash in the less expensive markets (such as Detroit, Buffalo, Indianapolis) or putting large down payments on their investments in the more expensive markets. Leverage can be a great thing, but has been over-taught and overused. Use leverage wisely or not at all in your next round of investing
A lease with an option to buy can be a very effective strategy if the property is in a solid location. The rent you charge will be more a month, but a portion of it might go toward the credits on the purchase price for the tenant/buyer. In return for an option to buy the home and the credits, the tenant might agree to handle small repairs, thus relieving you (or your management company) of some of the upkeep duties.
There are still big opportunities out there for people who would like to invest in rental properties, but it will take education and a strong team to help you become a successful real estate investor.