Saturday, December 19, 2009

Estimate Rents Conservatively!

Our tip today relates to one of our earlier tips about being careful to consider worst case scenarios before you make a deal. This tip is don't overestimate rent! However, don't be afraid to look for rental property deals now either.
In a soft economy, it is very possible that the rent you received 2 years ago will not be what you may receive today. If you purchase property with overly optimistic assumptions on rental return, you may find yourself unable to repay loans or have that important reserve we mentioned before, needed for repairs and vacancies. Now it is true that with increasing foreclosures, the demand for rental property is likely to increase. Additionally, those landowners who are in over their head may be unable to rent their property at a level able to keep up with their purchase obligation, and there may be some good rental distress deals to be had.
There are some interesting subtle clues out there that you can pay attention to discern if the rental market is going to be supporting rental price increases. Watch commercial lenders- are they heating up for multiple family units? If not, this may be an indicator that they believe there are going to be more vacancies. This is currently the case in many markets today. Obviously increased demand with decreased availability will translate to higher rent potential, and vice versa.

Just be cautious. Make your deals based on what the immediate area is likely to rent for now, by analyzing similar properties in the neighborhood. Keep an eye open for the signs of an opening up of the rental potential. If those early signs seem promising, make the deal based on the income you are fairly certain you will get now, knowing you are more likely setting yourself up for a much better return in the future. If you are careful with your expenses now, and cautiously pessimistic regarding rental return, there are definitely deals out there now in the medium to larger rental properties.

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