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How To Invest In Rental Property Market: What You need to Take Care?

The Commerce Department has estimated that rental hikes over the past decade has averaged about 1% annually when adjusted for inflation. However, economic conditions have changed substantially within the past few years, and rent hikes are perking up in a wide range of communities. President of Peggy Alford predicts that rents will rise by 7% annually in the next two to three years, with some areas experiencing a growth rate as high as 30%. Overly optimistic from an insider? Perhaps. Nevertheless, there is no arguing that the vacancy rate is dropping and is likely to continue for at least a few years.

How To Invest In The Hot Rental Market?

With foreclosures taking over neighborhoods, property prices down, and the lowest mortgage rates seen in a very long time, the easy answer is to purchase properties, then rent them out.

However, the competition for foreclosures is also heating up, as investor groups blanket neighborhoods in search of good deals. A good case can furthermore be made at reviewing the worst case scenario. If you have a four to five year time horizon and have a dependable renter in mind, you have the best of both worlds. Nevertheless, crooked renters can quickly turn your dream investment into a nightmarish scenario.

The vast majority of renters are decent enough people, but unscrupulous renters looking to build up their cash reserves can leave you deep in the hole. Depending on the location, the eviction process can take anywhere from six to twelve months to complete, and this is after you have already forfeited several months’ worth of rent. Moreover, they can also leave you with a thoroughly trashed property as a souvenir.

Rental properties are best suited when they are local, as renting can involve a myriad of minor headaches that have to be dealt with in a timely manner and also become costly. When evaluating an area to invest in, these trends should be researched: area job outlook, potential property prices, and finally, rental yield, which is anticipated annual rent income divided by purchase price. A rental yield of below 8% is not recommended as adequate for the risks involved.

Two other avenues that can be explored and involves less capital invested are the REIT and ETF sectors. Here are a few:

  • iShares FTSE NAREIT Residential Plus Capped Index Fund
  • SPRD Dow Jones REIT ETF
  • Vanguard REIT ETF

Remember the horribly toxic Mortgage Backed Securities (MBS) that brought the whole world to its knees in 2008? A newfangled hybrid is expected to hit the market soon. Similar to a MBS, this new type of security will be backed by, not mortgage obligations, but rental income. Sound familiar? However, it is worth keeping in mind that, almost like pyramid schemes, early investors tend to walk away with huge profits. This proposal has already been submitted to Standard & Poors for evaluation and ranking.

Freddie Mac recently released its June 2012 Economic and Housing Market Outlook and reports that 1.5 Million family units had moved into rentals in the past year, a 4% increase over the previous year, and that rents had increased from 2% to 4% in the past year. Therefore, is it time to start investing.


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