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Monday, January 21, 2013

Why You Should Invest in Distressed Market Rental Property

In today’s real estate market, investing in residential rental properties has become extremely attractive.

·       In 2012, 36% of renters preferred single family homes as opposed to apartments, up 5% since 2006 (The Kiplinger Letter).

Top reasons to invest in rental property:
 
Passive income with positive monthly cash-flow

Current widespread increase in rental demand
·         Inventory is down due to a decline in residential building activity
·         Creditworthy homebuyers can’t secure financing for mortgages due to stricter underwriting and increased regulation

Having a sense of financial security
·         Sell off your cash-flowing fully rented property to an eager investor if you are ever in need of quick cash
·       
Rental Property in Distressed Markets, Cash-Flow & Monthly Mortgages:

Source
Location
Price
Rental Income
Mortgage Payment*
Sold on Bid4Assets
Cleveland, OH
$19,900
$700/month
$110/month
Sold on Bid4Assets
Fort Myers, FL
$48,250
$700/month
$267/month
Listed with Agent
Los Angeles, CA area
$320,000
$1,775/month
$1,770/month

*Based on 30 yr mortgage, 100% loan amount, 3.5% interest, 1.25% property tax, and .5% PMI

In highly distressed markets like Cleveland, Detroit, and Buffalo, you can buy a house for around $20,000 that will rent for $700/month. Financing will be difficult on a property like this, but if you were able to get a 30-year mortgage, the payment would be in the ballpark of $110/month. You can buy a home in mid-range market like Fort Myers for around $50,000, which may rent in the ballpark of $700-$800.  A mortgage payment on a house like this might be around $267/month.  In the more expensive Los Angeles market, an agent has a cash flowing duplex listed at $320,000, which generates $1,775. 

While the rental income is 2.5X that of the more distressed markets, the price is six to fifteen times higher.  In other words, you could buy around FIFTEEN cash flowing houses in highly distressed markets like Cleveland for the same price as a cash flowing duplex in parts of Los Angeles!!!

In summary, distressed markets have a massive gap between rental income and mortgage payments, while in stable, higher-priced markets rental rates tend to be close to mortgage payments.

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