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.

Best Rental Houses

Buying Rental for ResaleWhen you are looking for the deal of the century, be sure to consider the best use for the property given the neighborhood and size of the home. There are many neighborhoods that are perfect rental area, others are ideal retail areas, and some better for lease/purchase options. Some are mixes of all three. When buying and fixing up a property for quick sale as rental property, it is important to analyze the best potential of that area's specific market.Additionally, when purchasing property for rental potential, it is almost always to your advantage to find a 3 bedroom as opposed to 2 bedroom home. Most customers interested in purchasing rental property will pass over the 2 bedroom, unless it is in a high demand vacation location, like a beach house. In unique and unusual areas, one may also be able to effectively market 2 bedroom rentals. Generally however, for rental resale, the best deals are the small 3 bedroom houses in the $50-$70,000 range which will rent on average $500-$700 monthly . A 3 bedroom will almost always be preferred by a renter over a two bedroom. When looking to purchase a 2 bedroom home, always look at the floor plan and consider if there is a way to convert it to a three bedroom to most advantageously market it as rental property.While it is difficult to attract buyers for rental purchase with a 2 bedroom house, it is similarly a small market interested in the high end as well. The cost/profit margin is just too small to make it as attractive to the real estate investor in most cases. Most investors able to secure loans to purchase a 2 bedroom rental home can often qualify for the 3 bedroom home too and a positive return is more likely.So know the area, know the potential, and convert to 3 bedroom when possible to most effectively market rental property.

More Thoughts on the Bottom

The housing crash affected markets across the country with cities that had been resistant, like San Francisco, falling spectacularly in the past year by a whopping 32% or more. Most analysts present a pessimistic picture, but seem to believe housing prices have bottomed out in many parts of the country. Prices are at the level seen around 2003, but would need to fall to the levels of 2000, to go back to pre-bubble prices. The silver lining is of course that it is a buyer's market, and there are great deals out there. If the economy rebounds soon, with inflation ignited by the stimulus package, then home prices will rise again. However, albeit with the current very low mortgage rates, home prices compared to average earnings are still higher than they were at the height of the 1989 property bubble. When that bubble burst, it took 8 years for market recovery. This current crash is larger, and the recovery could be respectively longer.
What kind of loan would a savvy investor in our area need in order for their rental to cashflow? The chart below shows the current average rental rates in King and Snohomish counties, as recorded by The Department of Housing and Urban Development's 2009 Fair Market Rent Documentation :
Efficiency-$720
One-Bedroom-$820
Two-Bedroom-$987
Three-Bedroom-$1,395
Four-Bedroom-$1,704

The chart below shows the loan that could be supported by the average rents above:

Payment* Sales Price Loan Amount Cash At Closing*
$1,700.00 $460,000.00 $345,000.00 $122,907.36
$1,500.00 $407,000.00 $305,250.00 $108,971.68
$1,300.00 $355,000.00 $266,250.00 $95,298.93
$1,100.00 $300,000.00 $225,000.00 $80,837.36
$ 900.00 $245,000.00 $183,750.00 $66,375.80

Most investors will be looking for returns that do not require such a large cash outlay upfront. In that case, housing prices still have a ways to fall!