There’s a few factors that are making investment rental properties look advantageous again in 2009:
1) Low Mortgage Rates
2) Low House Values / High numbers of foreclosures
3) $8k “Free” tax credit
4) Poor investment alternatives – interest rates are low on bonds/CDs/MMFs and the stock market is uncertain
Here’s a potential plan of action for people who do not currently own a home and can qualify for the $8k credit:
1) Find a house for very cheap in an area that will be easy to rent to. For example near a university where you could rent to responsible graduate students – perhaps by making friends with the graduate program advisors who help international students find housing. I would love a nice 25 year old Chinese graduate student who scored 1500 on his GREs and studies 70 hours a week to rent out my house for 5 years while working on a PhD. Another possibility might be within walking distance a subway/train station of an large urban area that takes people “downtown” I would avoid some place like the beach.
2) Make sure the house is around $100k to $120k and rents are around $700 to $800 per month in the area. This means you can likely get your mortgage down to around $600 to $700 a month depending on property taxes/insurance. This seems reasonable for the housing market around Phoenix where I am moving. Perhaps its unreasonable in other areas.
3) Live in the home for 3 years, essentially almost for free since you were renting before and now paying about the same in mortgage. Factor in mortgage interest deduction but also additional expenses for maintenance.
4) After 3 years, move out, and either start renting or start saving up a downpayment for another house. Transfer the old house to a REIT for asset protection and tax purposes and consider it an investment property. If the housing market made a huge recovery in 3 years then consider selling this property to buy your new house and “lock in” the profit tax free (up to $250k capital gains, which is unlikely to exceed on a $120k house). If the housing market is still crappy in 3 years or possibly worse, then enjoy buying your second house at a nice discount, perhaps with the 2012 version of a stimulus credit.
5) Consider accelerating the payments on the rental house to reduce your overall debt ratios and then enjoy an effectively “free” income stream for life. My preference would be to pay off the first rental house before buying a second rental property.
Key Points for this to work:
1) The Mortgage payment must be within -/+20% of what the current market value of rent is in the area.
2) The area must have a reason for a large number of people who want to rent – such as near an university.
3) You must have 6 months of mortgage payment in liquid MMFs in case you cant find a renter and I don’t want to read you posting on FWF next year about “I cant find a renter what should I do with my rental property?”
4) You must be willing to eat a small loss each month between rent received and mortgage paid with the understanding that your mortgage payment will be the same each month whereas rent should increase with inflation and increase your profits over time. Also building equity in the house to the point where you completely own it and it will be mostly profit.
5) You must be willing to hold the property indefinitely and not count on flipping it for a profit, ever. The housing market may never recover but the inflation-adjusted income stream will last forever provided you can eventually pay off the mortgage and cover taxes/upkeep.
Thought Ideas for the this:
1) How can I hire a realtor or other local agency to handle leasing out the unit for me and what percent do they take? If the rental house is more than a few hundred miles away, it might be worth it to pay someone up to 20% of the monthly rent to handle everything.
2) Consider writing the lease in such a way that the garage is not included in the rental. Then you can use the garage for your storage, perhaps installing a sink and toilet and using this as your “guest house” for when you have to visit the property or are in the area anyway and want to save $50 from a cheap motel. Then using a local gym for a shower. Or perhaps installing a small shower into the garage in a very small bathroom setup.
3) The rent-stream should adjust with inflation so this can be considered an inflation-adjusted annuity of sorts as part of your overall portfolio.
I love the idea of having passive income streams and having a rental property may be one way to diversify your iincome. With the job market being uncertain in todays climate, it would be nice to have at least a slight income coming from an investment property. My eventual goal in life is to make $100 a month profit from a rental property, a few hundred a month in interest from CDs/MMFs, a few hundred a month in stock dividends, and then be self employed and just do as much work as I really need to do. Perhaps have my novel series written that I have been working on give me perpetual income of a few thousand dollars a year. I want to keep my money as diversified as possible.
Again – DO NOT COUNT on flipping the property for an investment and DO NOT COUNT on owning 1000 rental properties and being a landlord. With the current $8k stimulus, low mortgage rates, and low housing prices, it seems like this is a very good opportunity for some to get their foot in the door of a rental property.
REO Foreclosure Directories:
http://www.biggerpockets.com/bank-reo.html
http://www.thedirectoriescompany.com/REOs.htm
http://www.mortgagenewsdaily.com/wiki/REO_Database_List.asp#6685
Lender REO Foreclosures:
http://www.countrywide.com/purchase/f_reo.asp
http://bankofamerica.reo.com/search/
http://www.citimortgage.com/Mortgage/Oreo/SearchListing.do
http://www.pasreo.com/pasreo/
http://services.mandtbank.com/personal/mortgage/reomort.cfm
http://apps.indymacbank.com/individuals/realestate/search.asp
http://www.us.hsbc.com/1/2/3/personal/home-loans/properties
http://mortgage.chase.com/pages/other/co_properties_landing.jsp
http://www.bbt.com/bbt/applications/specialassets/search.asp
http://realestate.regions.com/servlet/Ore/ForeclosedPropertySearch.jsp
http://suntrust.res.net/
HUD Foreclosures:
http://www.hudauctionwatch.com/where-to-find-hud-homes-for-sale/
REO Inventory Listings:
http://www.emailforeclosures.com/
http://www.reotrans.com/
http://www.reosource.com/
http://www.reoexperts.net/
