Buying a Home To Rent

“The Perfect Storm”

I was reading an article today and in it an investment fund manager was quoted using the term “perfect storm” as an analogy. I thought to myself,  “What an unfortunate time to use that analogy.” That guy shouldn’t be making a lot of speeches where the public can hear him! At the same time, he was making a valid point. He was talking about the current condition of the rental market. In fact, the reason he was being interviewed is because the investment fund that he manages is starting to include single family residential rental properties in their portfolio. It’s not often that we hear about institutional money buying up residential real estate. Although he may not win any awards for etiquette, he probably knows a thing or two about recognizing opportunities when they appear. So what did he mean by saying that there is a “perfect storm” in rental properties right now? Let’s take a look.

The Basics

If you are going to invest in rental properties you have a few goals.

1. Buy properties for as cheap as possible (also known as “making your money going in”).

2. Use as much of other peoples money as you can and pay the lowest possible interest rate for that money.

3. Charge as much as you can for rent to maximize your profit!

Pretty simple stuff. Lets take a look at what is currently going on in the market

Opportunity in Distressed Properties

REO’s and Short Sales are in high supply. REO’s are properties that have been foreclosed on and are still owned by the bank. REO’s are typically in worn condition and the banks that own them can’t wait to get rid of them. That means that you can typically purchase them at a discount, put some money into them to spruce them up and make a nice return renting or reselling them. The big time investors have already taken note of this and have secured a few 100+ property purchases from banks in the U.S. to use as rentals. Short sales happen when home owners need to sell their home but owe more than the home is worth. Since they won’t be able to completely pay the bank back when they sell, the bank agrees to take an amount “short” of what is actually owed. Often times short sales can also be purchased at discounted prices and the numbers of short sales across the country continue to rise.

According to the most recent CoreLogic National Foreclosure Report Denver is currently 14th in the nation for most foreclosures with 8,192 completed in the past 12 months.

Rock Bottom Mortgage Rates

Borrowing money in America has certainly been easier in the past (remember the mid 2000’s) but rarely in history has it ever been cheaper.

In the past 20 years 30 year mortgage rates have dropped by over half from 8% to 3.5%
- mortgage-x.com

What does that mean to a potential land lord? For a property worth $100,000 it is a difference of over $200 per month in income. Hmmmm, could I use an extra $200 per month?  Yes, yes I could!

Lending Qualifications

The days of the NINJA loans (No Income, No Job, No Assets) are gone. The events of the past few years in the housing industry have caused mortgage lenders to become much more stringent when qualifying borrowers. There are a good number of people who have decent income and solid credit who in past years would have been home owners but in this financial climate, can’t qualify for a loan. As a result a smaller percentage of potential home buyers have the ability to buy homes and have to rent. In addition to that, remember those foreclosures and short sales we talked about? All of the owners of those homes won’t be allowed to purchase homes again for at least 2 years and often times longer.  In turn, the demand for rentals has gone up driving rental rates up. At the same time with more people trying to rent, vacancy rates (one of the biggest risks to owning rental property) are dropping, taking the risk with it. Those two coupled together make the job of being a land lord sweeter than ever.

Boulder Rental Rates – ApartmentRatings.com

National Rental Vacancy Rates – U.S. Dept of Commerce

Perhaps the idea of owning a rental property sounds far too boring in comparison to your Facebook stock.  On the other hand, if you are the type that loves the idea of building your real estate empire, the cards have never been stacked in your favor as much as they are now.

Best of luck to you!

-Ken Crifasi

Find out what Warren Buffet has to say about Investing In Real Estate.

CoreLogic’s National Foreclosure Report 2012

Boulder Colorado's Best Real Estate Agents

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