Investing in Rental Houses?

rental house in suburban neighborhoodInvestment in rental houses has become prolific these days.  It started with large hedge funds buying tens of thousands of empty-foreclosed-homes from the banks.  They were getting these houses for around twenty cents on the dollar. After attempting to turn these properties into rental-backed securities (they just can’t control themselves) these large hedge funds decided it did not work. They were sending out their prospectus to investors with wonderful claims of seven percent annual returns on these investments.  Based on an average of fifteen hundred dollars per month income per house.  The problem was over half of these houses had been abandoned for many years and many were in very bad neighborhoods that most potential renters would never live.  No matter what the rent payment would be.

This was just another scam to defraud pension fund managers chasing better returns.  Unfortunately, many small investors jumped in and started buying houses all cash and are attempting to rent them out like the big boys of Wall Street.

Now I must admit, I know an investor that has over seventy-five houses now and seems to be doing okay.  The difference with this investor is, he has been doing this his entire life and knows the incredible amount of work managing properties can be, repairs in the middle of the night, evictions of tenants and so on, is continuous and can be painful.  You have to hire and manage employees and subcontractors. This can be an expensive business to get into, especially houses!

The going annual gross return on rental houses is now about one percent of the purchase price of the property.  $160,000 dollars for a house in cash, you would have to charge $1,600.00 a month rent or one percent.  

After expenses (taxes, insurance, maintenance, eviction, etc.) your cash on cash return would more likely be around $800.00 a month gross profit.  Which would be a net profit of six percent.  This would be pre-debt service.  So, the only way to make a six to seven percent return, cash on cash, the purchase would have to be all cash and it would have to be in nicer homes, not beat up properties in questionable neighborhoods.

Now that the underlying economy and the unemployment (and under employment) is not improving, this dreamland of huge returns by buying houses may become a nightmare.

No matter what the “experts” at the National Association of Realtors say, the Real Estate market is topped off now and will fall again.  The increase in house buying activity the last year or so was engineered by these large hedge funds and could be classified now as a failed experiment.

My advice is to NOT get into the home buying/landlord business unless you have been in this type of business in both bad times and good times.

I constantly try to remind my buyers that real estate, in general, is a long-term investment and every attempt by some Wall Street hedge fund, Banks and Governments to turn real estate of any kind into paper securities always ends in a lot of pain for the general population out here.

The beauty of having real estate with no debt is security in good times or bad but is not for the layman.


Bill Witter

Equity Pro Realty

Commercial Division


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