It’s no big secret that the rental market was flooded when the housing bubble burst. Rents have been going up since then, and as 2013 comes to a close- they’re at about a 4% increase. As this happens, many people are obtaining rental properties and investing in this way. It’s not without merit, as economists have predicted that the yield on these will hit about 6% soon.
One way that many are doing this is in buying distressed properties, then fixing them up. Statistics show that between the years of 2008-2011, over ⅓ of all home sales were this type of property and then, in 2012, ½ of all investment properties purchased were distressed. There is definitely something to flipping, but if you plan to do it, it’s important to do it wisely.
The first tip is to check out places where the prices are still low but employment is steady or getting better. Foreclosure auctions can be an excellent way to obtain a distressed property, but make sure you are aware of any tax liens and other issues that can come along with. In these cases, it’s always a good idea to work with a real estate agent, particularly one with experience working with distressed sales. While it may seem easy, on paper such transactions can get a little more complicated and another benefit is that you’ll be working with someone who probably knows when new options arise.
Even though you know the property is going to be a little run down, it’s still best to have someone inspect the property and let you know how much you may be in for to rehab it. Look at the taxes and tack on a bit extra just in case. You never really know what kind of unexpected costs may arise.
If you plan to flip it for sale, this is one thing. However, if you’re looking to expand your pool of rental properties: make sure you’re getting them rehabbed with that in mind. Consider what amenities people are looking for and what they’ll pay for them. Look around at nearby properties and what they have to offer, in addition to what rents they’re charging.
As with any real estate transaction, never, ever buy for price. A cheap property becomes an expensive one really quickly if there are extensive or expensive things that need to be done to make it occupiable. However, you also shouldn’t be wary of low-balling even further down on the asking in these situations. Many times, people just want to get the property off of their hands. What you can do in these situations is take the current appraisal and negotiate. While you’re doing that, pay attention to the higher capitalizations rates, the ROI based on your projected rental income and divide it by the purchase price. Those higher capitalizations do involve more risk but it can often pay off well.