June 21, 2008: Investors are coming back to the Phoenix rental home market -- and with the right business plan they'll make money
Rental home investors are coming back into the Phoenix real estate market, and this is a good thing.
The last time we had a substantial run on rental housing, results were not so sweet. Investors came to Phoenix with the idea that price appreciation would make up for any monthly losses they might take on their rental homes. It's plausible they were right -- in the long run. In the short run, negative cash flow and declining values, coupled with adjustable-rate or negative-amortization loans, drove many of these homes into foreclosure.
And this accounts for much of the inventory the new wave of investors is drawing upon. The difference is, the prices for these homes have declined enough that they can be -- at least potentially -- cash-flow positive.
Why only potentially cash-flow positive?
Because too many investors adopt the worst of the cartoonish characterizations of capitalism when they resolve to become landlords. They pick the cheapest properties in the worst locations and rent to the least-qualified tenants, living through one eviction and repair nightmare after another.
Here's a strategy for making more money from a rental home -- much more peacefully.
There are dozens of costs associated with rental housing, and your business plan should take account of all of them. But your biggest potential losses are always going to be vacancy, tenant acquisition, repairs and resale value.
It makes much more sense to me to buy a property that can command premium rents and will sell at a premium price when you're ready to move on. Location matters, as do the livability and lifestyle factors of the specific home. You want to pick a home that will stay rented.
I think it's a good idea to charge something less than the market rent. This will give you a broader array of tenants to choose from, which will enable you to select tenants with good credit who will treat your property like their own.
With the right house and the right tenants, you should have very little vacancy, no evictions and no costly repairs between tenants.
Greg Swann is the designated broker for BloodhoundRealty.com, a full-service Metropolitan Phoenix real estate brokerage. This article originally appeared in the West Valley regional sections of the Arizona Republic.
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