What Is It?
As the name suggests, long-term real estate rental investment is the tool in which you purchase properties (hopefully below market value) with some money down and then rent them out with some profit. The profit will vary by property, but over time you pay down your mortgage and eventually when the property is paid off you receive the full rental income. With multiple properties and with enough time, the income can become quite significant.
Why Long-Term Real Estate Investment?
In my first guide (click here if you missed it) I went over the very basic first questions you should be asking yourself when considering real estate investment as a potential source of income or as part of your retirement portfolio. So why long-term real estate? Very simply because passive income is key to financial success and independence. Passive income is money that you earn even while sleeping. While there is some work to be done before and between tenants, in an effective investment this should be minimal.
Currently rates in our market are still incredibly low and it is so easy for homeowners to buy or refinance into rates that will keep payments low enough for rental income to more than cover the mortgage. This is beginning to become so prevalent in fact that CNN Money worries about the low real estate inventory and thus limited sales growth. Rental rates are up, property prices are down but have plateaued and are beginning to appreciate. There are deals to be had.
Buying Below Market Value
Determining Market value
Ideally you want to buy homes at least 10% below market value. Obviously to purchase below market value you need to know what the actual value is. For myself, I am a real estate agent so it is easy for me to look up comparable properties and get a good estimate of the actual value of a home. Zillow does provide it’s ‘Zestimate’, but just yesterday I was making up a CMA (comparative market analysis) and Zillow’s values were below mine by just under $50,000! If this was a property I was looking to purchase, I wouldn’t make a move on it based on Zillow’s estimates. I highly recommend finding an agent to assist you in your investing.
Real Estate Owned
Purchasing REOs(Real Estate Owned) is another good way to purchase homes below market value. REOs are properties that have been foreclosed on and are being sold by the bank. REOs are nearly always listed on the MLS (multiple listing service) by an REO agent. Every bank deals with REOs differently, and some banks are willing to negotiate while others are adamant about pricing. Regardless, purchasing REO houses can be a great way of buying below market value.
Short sales are properties still owned by a private seller, but they are attempting to sell a property for less than they owe the bank. This happens frequently in areas where there was a huge rise and fall in home values. To sell the home the bank has to approve the offers after the seller himself has approved of it. Typically these transactions take anywhere from six months to a year. When short sale opportunities come available in the Tahoe market, they are snatched up within days. The last one that I saw here sold within 24 hours.
HUD homes are similar to REOs in that they are homes that have been foreclosed upon. In this case however, the FHA insured the mortgages and thus the “bank” in this case is the government. HUD homes have an online bidding system found here: . All bids have to be entered by a licensed real estate agent, and all bids are sealed. No potential buyers can see another’s bid. Purchasing HUD homes can be difficult for investors due to some of the owner occupied bidding periods. There are also additional costs associated with purchasing HUD properties that aren’t typical of other sales. These include things like title insurance, all utilities for inspections, all inspections, etc. Despite this, many investors can and have purchased homes well below market value from HUD.
Another source for purchasing is off market properties. Also sometimes called FSBOs (For Sale By Owner), these properties are not on the MLS and are sometimes not even advertised as for sale. These can be found through word of mouth or advertising by the investor. You know those signs that say things like: ‘We buy houses ALL CASH’? These are placed by investors who are purchasing homes below market value, or are speculating on an increase in the market.
Getting a Return On Investment
Think About Future Resale Value
You know the adage, “location, location, location” and it should not be ignored. Renters care about where they live as well, and it is always good to have an exit strategy in mind. If for some reason you do have to sell your rental in the future, make sure it is in an area that WILL appreciate. Equity growth is still important in long-term investments. Not only does it provide you with a way out in the future, it will also help to drive rental prices up over time. Know your areas and plan accordingly. Houses in the Sierra Tract are generally cheaper and can be rented out quickly and easily, but equity growth in that part of town is much lower than say the Al Tahoe area.
Maintenance and Time
Look for newer or low-maintenance properties that will stand the test of time against renters. You don’t want to have to deal with major repairs if you can avoid it, and even some of the best renters are less careful with a home that they rent than they would be with one they owned. Many investors choose to purchase homes that are 20 years old and newer for those reasons. While that isn’t always an option, you should absolutely make yourself aware of any issues in the era of house you are purchasing.
You also need to consider how much time you can devote to oversight and upkeep of your investment. Living nearby can alleviate many issues, and potentially save you thousands in property management fees. If you can’t repair or hire occasional professionals to do jobs, or can’t deal with collecting rent and maintaining your books due to time or stress, then you likely need to hire a property management company. Make sure that what they save you in time makes or saves you that much money in another area.
Income and Expenses
Be realistic about rental prices for your property. Speculation and “holding out” can cost you thousands of dollars and turn an investment into a huge burden. Being able to charge more than your monthly mortgage will require a combination of purchase price, down payment, location, and amenities. An old real estate maxim states that a rental property yielding one percent of the sales price per month is a great deal. An easy example is if your investment cost $100,000 then you should get $1,000 per month in rent. This would provide about 12 percent annual yield. This is not easy to come by, especially in the Tahoe area itself. It may in fact not even make sense based on how much down you put and how much you are actually having to pay monthly. Figure out your cash flow and what your expected monthly and yearly returns are. If you are making money consider putting that into the mortgage to pay it off early. If you can make a little bit on multiple investments consider doing the snowball payoff method. Pay down the lowest one as quickly as possible. The sooner those mortgages are paid off, the sooner you can begin actually enjoying the returns.
A Huge Topic
When I first had the idea to write about the different investment types I didn’t really consider the depth of the topics. We are at just about 1500 words and I don’t even think we’ve scratched the surface of this topic. We’ve simply looked at it… and not even in its entirety. This series I feel is going to be much longer than I had originally anticipated, but I intend on making each post worthwhile and approachable. As always I am happy to answer questions and discuss these topics much more in-depth with anyone. Remember: Ask questions, become informed.