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| A community of townhouses. | © Studioaltius/Getty Images |
By Peter G. Miller, Bankrate
In the COVID-19 economy, buying rental property raises many questions
investors have never had to ask before. While the demand for rental
units remains strong, new and changing pandemic rules mean investors
have to weigh acquisitions carefully. While the general numbers right
now are attractive - lower vacancies, higher rentals and cheaper
mortgage costs - not all markets are the same.
How to buy rental property
Given so much uncertainty, is now the time to invest in real estate?
There's no one answer, because real estate is a localized commodity and
markets differ. Old assumptions about tenants - that they will pay
their rent and have the financial capacity to make such payments - are
no longer so clear. Buying rental property at this time requires a look
at new considerations and realities.
1. Look for investment sellers
Owners with cash-flow problems
may be interested in selling rental units to pay off debts and increase
financial reserves. Owners discomforted by the new rules and changing
economics may feel that now is the time to sell.
2. Play by the new rules
Use traditional tips and strategies to consider the purchase of a rental property,
but modify bids to account for today's new realities. This includes
assessing whether to buy the property outright with cash, if able, and
budgeting for periods when tenants may be struggling to make rent
payments. Be sure you have sufficient reserves to carry the property if
tenants run into financial difficulties.
3. Find an experienced lender
Work
with a lender who handles single-unit investment properties, and get
their advice regarding financing options. Be realistic when you consider
property costs and expenses, projected return rates and the risks of
ownership.
4. Look for overnight rentals
Currently, the
market for short-term rentals has declined as travel restrictions and
worries have hobbled the hospitality industry. However, many of today's
overnight rental properties started out as single-family homes. With
good money from short-term rentals, such properties have become more
valuable, and have impacted home values in major cities.
5. Get professional expertise
It's
always smart to work with knowledgable brokers and attorneys when
buying, selling or operating rental properties. In the COVID-19 economy,
rules are changing on the local, state and federal levels with unusual
rapidity. Real estate professionals can help you sort through the new
standards and avoid costly mistakes.
Benefits of a rental property
The
ownership of rental real estate has been a traditional source of
wealth. As a long-term investment, many have done well with real estate.
The reason is that real estate offers a number of benefits:
- Rental properties with one to four units can be readily financed and refinanced with residential mortgages instead of more costly investment financing.
- Rental properties with two to four units can be used both as personal residences and as rental property at the same time. Buying such properties is often a good way to get into the rental business.
- Rental property is associated with a number of significant tax benefits. You can write off mortgage interest, property taxes, property insurance and other costs. Because of depreciation, it's often possible to have both positive cash flow and an accounting loss for tax purposes.
- Rising home prices can increase owner equity over time. In communities with rising property values, many rental owners have been able to get the benefit of increasing home prices as well as mortgage balances that fall each month.
- As values grow, rental properties can be refinanced to free cash for other uses and purposes.
Risks of a rental property
There's no investment that's a sure thing - they all have risk.
For rental property, there are several to be aware of:
- The property might be vacant for an unknown length of time.
- It can cost big money to fix up and maintain a home.
- Tenants may damage rental property.
- Local property values can decline.
- The property may be subject to rent control in certain areas.
Bottom line
No
one knows how long the coronavirus will continue to impact the economy,
how long recovery will take, what additional federal actions will be
approved and how much higher unemployment will go. Such factors mean
that investors need to look at rental properties with a new, strategic
focus.
See more at Bankrate
