Six Mistakes Investors Make

Investing in real estate right now can be surprisingly profitable as rents are on the increase in many areas due to the number of people losing their homes to foreclosures or doing a Short Sale of their homes. 

Remember that owning rental property is time consuming, expensive, challenging, and many investors lose money. 

Mistake 1:  Confusing a cheap deal for a good deal – You can buy homes at a low price but that doesn’t mean you can rent them out.  They usually aren’t any more appealing to rents than they are to buyers.  Also less-desirable school districts may hamper renting your property. 

Mistake 2:  Overlooking key costs – Knowing potential rent is not enough.  You should also factor in closing costs 3-6%, costs to fix up the place and maintain it, and your holding costs.

 Mistake 3:  Forgetting that time is money – You lose money when your home is empty, whether you are trying to rent it, in between tenants or painting.  You may be better off accepting a lower rent than waiting for a higher-paying tenant. 

Mistake 4:  Assuming you will sit back and watch the rent roll in – You are a rent collector and sometimes tenants lose their jobs and stop paying rent.  Evicting them can take several weeks without rental income coming in. 

Mistake 5:  Underestimating repair costs – Carpet in rentals typically must be replaced every five years and you may have to repaint after every tenant.  The National Association of Residential Property Managers suggests setting aside six months of expenses so that you will have funds if a major repair is needed. 

Mistake 6:  Assuming that owning a rental is the same as owning a home – You might put up with flaws in a home that a renter won’t tolerate.  A property manager can handle most headaches, but you should expect to pay up to a month of rent for finding and screening tenants and up to 10% of the monthly rent for management fees.

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Cashing in on rental property

One bright spot in the dismal real estate market is the rental market.  Demand is up and rents are rising.  That’s partly because those foreclosures have turned more than 4 million former homeowners into rents, but also because many other prospective homeowners, worried about losing their jobs or housing prices falling a lot further still, are reluctant to buy now. 

As with many investments, the best time to get in is when most others are sitting on the sidelines. 

Mortgage rates are at a 40 year low, and homes in many areas are ultra-cheap.  Meanwhile, demand for rentals has risen in more than 500 cities.  With this increase, it has allowed landlords to charge more.  Hotpads.com, a real estate research firm, reports that rents nationwide jumped 11.6% in 2010 to $1,320 a month. 

You’ll need that rental income to tide you over until home prices bounce back; in fact, the typical investor today plans to hold for 10 years, according to a survey by the National Association of Realtors.  If you can hang on that long, you have got a good shot at solid gains, especially if you are financing the home. 

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Six Mistakes Investors Make

Investing in real estate right now can be surprisingly profitable as rents are on the increase in many areas due to the number of people losing their homes to foreclosures or doing a Short Sale of their homes. 

Remember that owning rental property is time consuming, expensive, challenging, and many investors lose money. 

Mistake 1:  Confusing a cheap deal for a good deal – You can buy homes at a low price but that doesn’t mean you can rent them out.  They usually aren’t any more appealing to rents than they are to buyers.  Also less-desirable school districts may hamper renting your property. 

Mistake 2:  Overlooking key costs – Knowing potential rent is not enough.  You should also factor in closing costs 3-6%, costs to fix up the place and maintain it, and your holding costs. 

Mistake 3:  Forgetting that time is money – You lose money when your home is empty, whether you are trying to rent it, in between tenants or painting.  You may be better off accepting a lower rent than waiting for a higher-paying tenant. 

Mistake 4:  Assuming you will sit back and watch the rent roll in – You are a rent collector and sometimes tenants lose their jobs and stop paying rent.  Evicting them can take several weeks without rental income coming in. 

Mistake 5:  Underestimating repair costs – Carpet in rentals typically must be replaced every five years and you may have to repaint after every tenant.  The National Association of Residential Property Managers suggests setting aside six months of expenses so that you will have funds if a major repair is needed. 

Mistake 6:  Assuming that owning a rental is the same as owning a home – You might put up with flaws in a home that a renter won’t tolerate.  A property manager can handle most headaches, but you should expect to pay up to a month of rent for finding and screening tenants and up to 10% of the monthly rent for management fees.

 

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Cheaper to buy than to rent in 72% of largest U.S. cities

Despite the rising number of renters in the U.S., it is cheaper to buy a home rather than rent one in 72% of the 50 largest cities according to an index released by Trulia.com. 

Trulia’s rent vs. buy index compares the median list price with the median rent on two bedroom apartments, town homes & condominiums listed on Trulia.com as of 1/10/11. 

In 36 out of 50 of the country’s most populous cities, buying a two-bedroom home is less expensive than renting one.  These cities also include many areas that have been hit hard by foreclosures, such as Sacramento.

A price-to-rent ratio of 1 to 15 means that it’s much cheaper to buy than to rent in a particular city.  A ratio between 16 and 20 means that it’s more expenseive to rent than to buy, but depending on the family’s situation, buying could “make financial sense” the side siad.  Any ratio above 20 indicates that owning is much more costly than renting in a city.

Top 10 cities to buy vs. rent:

Rank City State Price to Rent Ratio
1. Miami Fla. 6
2. Las Vegas Nev. 6
3. Arlington Texas 7
4. Mesa Ariz. 8
5. Phoenix Ariz. 8
6. Jacksonville Fla. 8
7. Sacramento Calif. 10
8. San Antonio Texas 11
9. Fresno Calif. 11
10. El Paso Texas 11

Source: Trulia

In 10 cities, renting is cheaper, but buying might make more financial sense, according to Trulia. These cities include Los Angeles, Boston, and Fort Worth, Texas.

The index considers the total cost of homeownership compared to the total cost of renting. Calculations for the total cost of homeownership include mortgage principal and interest, property taxes, hazard insurance, closing costs at time of purchase, homeowners association dues, and private mortgage insurance. The homeownership cost calculation also includes tax advantages from mortgage interest, property tax and closing-cost deductions.

Calculations for total rental cost include rent and renters insurance.

The total cost of homeownership was highest, compared to the cost to rent, in New York; Seattle; Kansas City, Mo.; and San Francisco.

Top 10 cities to rent vs. buy:

Rank City State Price:Rent Ratio
1. New York N.Y. 31
2. Seattle Wash. 24
3. Kansas City Mo. 21
4. San Francisco Calif. 21
5. Memphis Tenn. 20
6. Los Angeles Calif. 20
7. Fort Worth Texas 19
8. Oakland Calif. 18
9. Portland Ore. 18
10. Albuquerque N.M. 18

Source: Trulia

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Buying vs. Renting

Are you still on the fence trying to decide whether to keep on renting or take the leap into home ownership?   You may never again experience these low home prices combined with the lowest interest rates ever again.     Check out this handy calculator to help you see the advantages of home ownership. (CLICK HERE)  

If you are still unsure, you should contact a REALTOR to discuss the advantages of purchasing a home and find out how much of a loan you can qualify for. 

Don’t be left sitting on the fence saying should’ve…..would’ve…..could’ve  Act now and contact your Real Estate specialist.

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