In this first of a three-part series, Danielle Babb, real estate investment expert and author of Finding Foreclosures (Entrepreneur Press), explores alternatives to flipping houses in the current economy. First, renting out your home and riding out the market.
Throughout the late 1990s and well into 2004, investors were flipping houses like there was no recession tomorrow. There was a lot of money to be made--and they were making it. Many owners were selling for 10 to 40 percent above the purchase price within months of buying a property. Those lucky souls who purchased in the late '90s and were able to sell in 2002-2003 could have doubled or tripled their investment.
On a $200,000 investment property (assuming you put 5 percent down), you may have earned $100,000 (50 percent appreciation) on a $10,000 cash investment--a 10-fold return! No wonder investors who flocked to real estate and mortgage companies had such a strong incentive to find suitable loans. It was a sure bet.
Times have changed. In today's uncertain economy, many weary investors are looking at where to put their money. Stocks are dropping; housing prices are decreasing in most areas. Nothing seems to look good. Worse yet, many investors are like me--they own a lot of homes that unfortunately aren't worth what they paid (or perhaps most important, what they owe on the mortgage). They don't want these homes to go back to the bank out of whatever obligation they feel (moral, financial, credit worthiness, etc.), yet they feel trapped in paying these high mortgages (that are also resetting faster than we thought).
You have an alternative--renting out your home. You can become your own landlord or hire a property manager to do it for you. If you're interested in going this route, consider these steps (assuming you're not hiring a property manager and paying the 8 to 10 percent monthly commission):
1. Determine the rental comparative analysis. One site I like is Rentometer.com. By typing in the rental address, city, state or ZIP as well as the type of place the home is, you can see what others are paying in the area. Coupled with Craigslist, this will give you an approximate rental amount. If you're close to a great school and have a nicely fenced-in yard, consider increasing it slightly.
2. Determine what utilities you will pay and what the renter will pay. You may pay water and sewer; all other utilities are up to the tenant. (Make sure to check thelpa.com, the Landlord Protection Agency, for laws in your state)
3. Be very clear with your application requirements. Make sure to ask for credit checks, application fees, etc. You will need these to assess your potential tenant appropriately. This is another way to use the LPA's site; you can run credit checks and download all the forms you need.
4. Advertise! List your incentives, too. Will you allow a first month free? Do you offer an early rental payment discount? If so, say so in your ad. Be sure you stay away from legal trouble and check out the Housing and Urban Development's list of dos and don'ts in your advertisements, too.
5. Once you find a renter, screen, screen, screen! Ask questions, call references, and be sure information on the application matches what you learn. Some people are "professional tenants" and know how to scam even the savviest landlords. Use the LPA's site for information on how to screen out these tenants.
6. Sign a rental or lease agreement, and be sure to monitor your property. Follow the law in each state, but drive by your property or have maintenance crews check on the property when they are on site.
If you can earn enough in rent to offset some of your monthly losses (or even all of them), this is an excellent alternative to letting your home mortgage become delinquent or letting your home go back to the bank.
I am personally toying with another option, too--renting out each room within my home to increase my rental income. If this works out, I will update readers in a future issue!