Throughout the U.S., there has been an increasing demand for residential rental properties from a spectrum of investors. Even lenders have caught on, now specializing in niche single-family rental home financing with special underwriting guidelines. 1 in 7 houses are now purchased by an investor or investors. A record number of 18% of all single family homes are being rented in 2013. So why is this?
Increasing rental rates along with artificially low interest rates are expanding margins for savvy real estate investors. Tightened credit and stricter mortgage standards for first-time home buyers have kept more renters stuck where they are and must keep renting for the foreseeable future. This, along with low real estate prices, are cash in the bank for real estate investors. Many of these rental homes in the DFW area will generate around 10% cash on cash return through an appreciating asset. Strategically throwing leverage into the mix can help finance an investment or multiple investments that can generate profits on borrowed money. Be careful, though, because over leveraging can be fatal. Favorable tax deductions are another piece of the puzzle in lowering taxable income by year end and maximizing overall profits.
Unlike stocks, real estate is a hard asset you can see and touch. Real estate requires more of a hands-on approach through management and maintenance, but can pay off with higher cash flows and overall larger profit margins. By re-evaluating a real estate investment on an annual basis, an investor is able to compare returns if the money were in different investments and answer the question “to sell or to hold”. Typically, investors will wait for the right time to sell by reevaluating each year and recapturing all, if not more, than the original investment, all while collecting monthly cash flows.
A common rule of thumb is to buy a rental home that can be leased out for around 1% of the sale price. This is a good starting point, but successful investors will maximize profits and minimize risk by hiring a real estate professional to help guide the ship along the way. Every investors’ needs are different. Talk to a R.E.INVEST Brokerage, LLC. professional today to see if you have what it takes to be a real estate investor.
by DAN CAMPANELLA, Broker/Owner @ R.E.INVEST Brokerage, LLC. on January 24th, 2014