Articles for Financial Advisors

Rental Property Returns

Rental Property Returns

Due to the cumulative losses of residential real estate from 2007 to the present, some investors are receiving 1-2% of their purchase price from renters each month. Generally, one should expect about half that range (or $500 to $600 per month for a $100,000 home) during "normal" periods of appreciation. In a 2012 article, The Wall Street Journal listed six traps that investors in rental properties often fall victim to:

  1. Confusing a cheap price for a good deal—The investor lives in a high-priced area such as San Francisco and thinks similar returns are possible in a lower-cost area such as Sacramento. The prospective buyer should verify rents in the area by canvassing local apartments. It could turn out that renters in some areas are given incentives, such as several months of free rent (thereby distorting some comparisons).
  2. Overlooking key costs—The purchase of a property often means paying closing costs and commissions in the 6-7% range as well as fix-up expenses, leasing agent fees, property management fees, property taxes, and insurance.
  3. Forgetting that time is money—Money is lost whenever the property sits empty, either due to a vacancy or having the unit painted or renovated.
  4. Assuming money will flow in effortlessly—When the investor becomes an owner, he then becomes a rent collector. Evictions can take several weeks, fixtures might be stolen, and maintenance may be an ongoing nightmare.
  5. Underestimating repair costs—Carpet in a rental must typically be replaced at least once every 4-5 years; repainting may be needed after each tenant moves out. One agency recommends the investor set aside six months’ worth of rent to fund a major repair.
  6. Believing that owning a rental is similar to owning a home—Homeowners end up accepting flaws renters will not. Many states and communities have very strict (and complex) laws landlords must adhere to, even if they only own one property. A property manager can handle most problems, but expect to pay up to a month of rent for finding and screening tenants—and up to 10% for the property manager.
Nationwide, renter-occupied housing represents 34% of all households. In cities such as Los Angeles, San Francisco, Boston, and New York, the number ranges from 62-68%.

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