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Real Estate Investment
With recent economic problems developing in the housing market, many investors are finding themselves wondering what the best approach to the market is as it adjusts. In real estate there are many different ways to invest, but two of the most common are flipping homes and renting them out. While the up-front cost of both is similar, you may be wondering what will pan out the best in the long run. Under the current circumstances it is necessary to think about both the longevity of an investment, as well as potential gains granted by a purchase. It is worth the time to examine both options, and don’t presume what is true within the context of the national market is equally true in your locality.
The first option, flipping, has been common in the booming housing markets recently. You purchase a home, put work into it, making it livable and then resell it for a profit. This technique works best within markets that are growing rapidly, allowing for a fast turnover after repairs are completed. When prices drop this option begins to look less and less attractive, as you cannot be sure how long you must wait to earn enough out of a property purchase to justify the costs. Under current circumstances, this is a more risky option, but it is not altogether impossible to make money flipping homes. It is a matter of patience.
On the other hand, renting out a home comes with its own set of issues. It requires a similar financial output to flipping a home, although admittedly you can likely begin renting a home before you are completely finished all renovations, unlike a property you are selling, which will only reimburse you upon its sale. Renting a home is a great long term strategy, playing a market that reliably goes up in value. While owning a rental home is a commitment, it is much more flexible, and can be very lucrative as a long term investment.
The circumstances of the market will obviously dictate your investment decision, but in the current situation it is less likely that flipping a property will be the most financially sound investment. The market is undergoing an adjustment, and as such it will take a longer time to turn a profit simply on an investment. Renting allows you to receive income while you are waiting to sell your property, a safer investment in a buyer’s market.
Posted: February 4th, 2008 at 12:50 pm
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Posted in
Real Estate Investment
Becoming a first time landlord can be a very lucrative proposition if you know what you’re doing. Unfortunately, most first-time landlords don’t know what they’re doing, so it’s very important to get information from people in the know.
First, learn the rules. Every state’s laws are different. Knowing Maryland property codes, especially with regard to required safety and security items, as well as any affordable housing laws, is of the utmost priority. For details, you should speak with your realtor. Also be aware that regular homeowner’s insurance does not cover tenants; you have to switch to landlord insurance.
Second, if your property is part of a home-owners association, check the bylaws to verify that they allow rentals, and, if so, what special rules apply to rentals.
If you’re still looking for the perfect property, your best gain will be to find a property that allows you to grow the net operating income. In plain english, this means to find a property that already has a renter, but where that rent is below average. These kinds of properties can be bought at value, and then the rent can be raised to market value. In such a situation, do not listen if the seller tells you that because it can rent for more, it is worth more; interpret these words as the seller saying: Do my job and assume my risk, but pay me as though I had done it myself. Only buy a property at the price that its current income justifies, even if you plan on raising that rent later on.
Once you’ve got a place in mind, you need to make sure you have access to a good contract. Be wary of generic pre-printed contracts available in office supply stores; these are often missing important language for your local laws, and these contracts often are thrown out as invalid if you ever go to court. Your realtor will be able to help you with this. If you buy from a previous landlord, you will already have a contract ready to go. Nevertheless, make sure you treat the relationship as though you were starting from scratch. Even if you use the same lease that the tenants had before, go over the contract with them. Explain the terms and legalese, because they may not have had this opportunity with the previous landlord. Besides, it never hurts to start off with a good impression.
After you’ve started your new career as a landlord, there are a number of things you should keep in mind. First, take care of the property; if you want tenants to treat your property with respect, then you must do so also. If something is broken, fix it. If something is dirty, clean it up. Deferred maintenance is always more expensive than aggressive maintenance. Taking care of your property will bring dividends in the long run, not just because fixing problems early on is less expensive, but also because tenants will pay more for a well-maintained property. (And it helps to remember that tenants will be more likely to default on badly-maintained properties.)
Also, you must keep in mind, no matter how friendly your tenants are, that accepting late payments is simply unacceptable. Once you accept one late payment, the next thing you know, every payment will be late.
Improving the property is also a good idea. By making the property better off, you can increase the net operating income, and your investment will quickly rise in value. Exterior lighting, CO2 detectors, and high-speed internet access are just a few ideas of how you can make your property more desirable. If this seems a bit excessive, then just look at the possibilities:
Value is your net operating income divided by capitalization rate. If the cap rate in your area is 10% (i.e. 10 times net operating income), and you buy a property, then by using the ideas in this short article, increase the rent by $800 each month, then look at what you’ve accomplished: $800 per month is $9.6k each year. That $9.6k, if the cap rate is still at 10%, means the value of your property has just increased in value by $9.6k / 10% = $96,000!
Of course, it takes time and money to create that kind of return. But what’s important to realize here is that this is not like gambling on flips; instead of relying on outside forces to determine your return on investment, you are creating this wealth yourself. After all, why gamble on how market forces beyond your control will turn when you make that return on investment all on your own?
So what are you waiting for? It’s time to get started! Because the most important thing to know about becoming a first time landlord is to just buckle up, find the right property, and get started! After all, without that step, none of the others even apply.
Posted: November 14th, 2007 at 11:06 am
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