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Investing in rental real estate

by Crown Team May 5, 2013

It has been said that the thing you know best you do best. The majority of Americans know how to evaluate rental properties, particularly residential housing. Since most home owners in America have been renters at one time or another, or have bought or sold homes, most have the ability to evaluate good rental real estate—at least when compared to buying commodities, stocks, or mutual funds.

Therefore, rental properties are a logical source of investments—but not necessarily for everyone.

owning versus rentingWise investment?

No investment during the last 25 years has been consistently better for the average investor than single-family rental houses. That doesn’t mean that residential properties will appreciate that way over the next two decades, but right now there doesn’t appear to be anything on the horizon that would prevent it either.

Housing costs are out of the price range of many young couples, and since they have to live somewhere most of them rent, at least temporarily. Therefore, rental housing is one of the soundest areas of investing for the average family.

However, there are some specific considerations that need to be addressed before investing in rental property:

1. Look for residential housing in your area or in a good rental area. Without a doubt, the three key factors in buying any rental property are location, location, location.
2. Be certain your rental house is a “fair” deal for the renters and for you.
3. Be sure your personality is conducive to being a landlord.
4. Have enough equity to ensure a good cash flow. If the house won’t stand as collateral for its own mortgage, pass it by. The principle of no surety must be maintained when purchasing rental property.
5. Make sure you have enough funds set aside to ride out the times when the property has no tenant.
6. Make sure you have enough funds available to cover needed maintenance and improvements, without having to borrow.

One of the attractive aspects of rental property is that the initial investment is not excessively large in many areas and usually the property can be purchased with a relatively small down payment.

An additional benefit is that once the property is rented the tenants pay off the mortgage with their rent payments, and much of the generated income is sheltered through depreciation, interest, and taxes.

Alternative to purchasing outright

If you do not have the initial funds to purchase a rental property, you might want to consider a joint venture of the rental home with a couple who will be living in it. Usually this means the investor provides the down payment and assumes a 50 percent interest in the property.

The tenant couple then pays the mortgage payments and all other associated costs, including maintenance. When the house is resold, usually after no more than 10 years, the investor receives the down payment back and the two parties split the profits equally. Although there is a risk that the property will not appreciate, that is the risk you run with any investment.

Rental housing negatives

There are some negatives that need to be considering before investing in rental housing.

1. Unless you have a strong personality and are willing to eject nonpaying tenants from time to time, you need to avoid becoming a landlord.
2. If you don’t want to be a landlord, don’t buy rental housing.
3. If you aren’t able to maintain and manage your rental property, many of the benefits decline.
4. It’s not always easy to get money out of the property if you need it.
Other rental housing options

An alternative to investing in single-family rental housing is to invest in duplexes and triplexes. The chances of a unit being vacant are cut proportionately to the number of tenants it will accommodate, so your income isn’t limited to one renter.

The flip side of the coin is that they require a bigger investment and more maintenance, and you really do become a landlord. If you don’t have the money to get into a duplex or triplex by yourself, there are two alternatives. You can invest in limited partnerships offered by individuals who purchase and manage duplexes and triplexes, or you can invest with another person. The key factor to keep in mind is that the managing partner has total control.

No down payment real estate

Although no money down real estate opportunities have been available for a number of years, they are very dangerous ventures. Since purchased properties are highly leveraged with no down payment, this financing procedure would be in violation of biblical principles of surety, as well as a typical example of the get-rich-quick mentality so prevalent in our country today.

In addition, there are serious questions about the legality of these programs that need to be answered. Even the possibility of obtaining a loan through the techniques offered in these types of programs is questionable in many instances. Most lenders would not carry such leveraged properties on a loan, so if you were to be involved in such a project, you probably would be carrying very high interest rates with questionable lenders.

Should You Invest in Rental Property?

Whether to invest in rental property depends on people’s goals and their present financial structure. If they are comfortable with handling real estate and rental property, rental property can be an attractive investment and a portion of a balanced investment portfolio.

Even in a bad economy people will need somewhere to live, but those interested need to evaluate whether they would have enough cash flow if rent goes down or the property is vacant for a month or two. The more equity an individual has in rental property, the more likely the value of the property will never drop below the loan value on the property.

Originally posted 5/5/13.

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