By Lois A. Vitt, Ph.D.
Anyone who knows how to pick stocks will tell you that successful investment starts with understanding the business of the companies chosen, buying low and selling high. The same is true investing in real estate. If you want to try investing in rental housing, this could be the perfect time.
Becoming an owner of rental homes has made millionaires of many who chose to take this investment path. If housing investment is your next move, it will be helpful if you are a seasoned homeowner, have savings and investments and the confidence to recognize and take advantage of income potential and equity growth.
It is also important to enjoy stability in your employment and in your family or partnership relationships when you take on any kind of real estate ownership.
The Business of Investing in Rental Housing
If you have what it takes to invest in and manage rental homes, you can reap rewards. But do not enter the rental housing market expecting to get rich quickly, or believing you will have an easy time of it.
Equity builds over time, and overseeing rental housing takes the same effort, and involves all of the ups and downs, of any well-run small business.
Here are a few suggestions when beginning your search for rental housing:
Learn the historical and current values of comparable properties in every neighborhood that interests you.
Take your time to research what you can and cannot afford. Estimate operational costs for each property in addition to financing, taxes, and insurance. Build in a reserve-for-replacement to cover major repairs and another to protect you during vacancy periods.
When you visit properties bring a notebook to take notes and a camera to take pictures of the inside, yard, and surrounding neighborhood. The pictures and information will refresh your memory later—remember, you could end up looking at dozens of properties.
Always order a housing inspection and pay close attention to the size of the yard in order to get an estimate of its maintenance costs.
Check out neighborhood and regional factors—climate, schools, commerce, transportation, employment—especially in a down market that could add or detract from the future rental (and sales) value of your property.
Your goal should be to own a low-to-mid cost rental property in a mid-to-high cost neighborhood so that your property will retain its value. The causes of decline often stem from neglected properties that can spread to whole neighborhoods and contribute to the lowering of market values.
It takes study, analysis, and good timing to learn your way around the housing investment arena. While each circumstance is unique, there are certain principles that apply to rental housing.
The Psychology of Home Investing
One such principle is your risk tolerance. The answer to questions of risk tolerance for rental home investors derive in part from factual information: age, income, experience, savings, future need for cash, and investing time horizon. They are also answered by the realities of market timing: factors such as interest rates, inflation, credit availability, rental and selling markets, over which an aspiring investor has no direct control.
However, like buying stocks “on sale” in a down market, a savvy real estate investor can also decide that a flat or fluctuating marketplace offers investment opportunities that are simply unavailable in a marketplace that is roaring upward.
About the Author
Lois A. Vitt is a housing expert and financial sociologist, and is the author of “10 Secrets to Successful Home Buying and Selling”, the first book to demystify the psychological forces behind our housing decisions. To learn more about Lois and this book, visit www.RealtyStudies.com.