Dallas, TX: Over the past few weeks, we have seen increasing news that home prices are dropping, mortgage down payments will increase, 30 year mortgages are going to disappear, and bank lending is still increasingly difficult for many home buyers. What does this mean for investors who can avoid the use of lending? There are signs that a rent bubble is forming, where supply for rentals will increase. A bubble is a situation where the market can become overheated. However, this will all depend on whether the market can find supply of rental properties to help with the increasing demand of renters. For example, if the single family foreclosure market turns into additional stream of rental properties, then this could help with easing the issues.
Among those who report the rental bubble could be forming are Harvard Joint Center for Housing Studies released a report in June 10 about the risk of a rent bubble, and Money Magazines 2011 Spring Housing Guide is predicting increasing rental rates due to decreasing vacancy issues. What does this mean for landlords and real estate investors seeking to build a rental portfolio? As the excess of rental inventory begins to decrease, there will be potentially increased revenues in the rental market. Additionally, if you are able to enter the real estate investment arena with all the barriers to entry, then you will be able to take advantage of the low prices to build that rental portfolio.
Now, I do want to caution real estate investors that the market will correct itself so waiting for years, so it is better to take advantage of deals as they come to you. Many real estate investors remain paralyzed waiting for the perfect deal, but in real estate that is not an option. Each property must be evaluated to see if it is a solid rental property investment. What are the local rents? What are local rental ordinances? How will you take care of ongoing maintenance needs for a property? If the investor does not have time to handle these needs, then finding a great real estate agent and property management firm will be important. As a investor, your limited time should be based on finding deals while leaving operational issues to experts focused on those elements.
Outsourcing is a big concept for many businesses today, and building a real estate portfolio is not any different. A real estate investor looking to build a single family rental portfolio should focus on:
finding single family home deals
getting estimates on make ready
find out what the rental rates are
analyze the cost of the deal (including rehab) against the cash flow
repeat the process if your cash flows allow it
Outsource the leasing and management to others to free up the investors time
Also another thing to caution against is that real estate investors in this arena should definitely look for great returns, but remember the bubble is not a permanent situation. Rental portfolios will gravitate to excellent solid returns in the long run, but it is not hedge fund like returns. Investors must compare returns to other options that they have and realize that stability and long run cash flow streams are what make this investment vehicle a great option.
Signs indicate that the low price to buy combined with increasing rent potential could create a situation where building a rental portfolio an attractive investment option for real estate investors. However, investors must analyze the deals presented before them, find the right professional to help them with their portfolio (real estate agents and property managers), and set the appropriate expectations for their real estate investments to avoid heart ache and worry.