Real Estate Realities
Taking Advantage Of The Rental Market
By David Rosenfeld
Jun 16, 2012 - 10:05:30 AM
SANTA MONICA—Today’s real estate market is still suffering from the down economy, but that doesn’t mean there aren’t opportunities for the smart investor.
It’s easy to let the bad news of today’s economy taint an entire industry like the real estate market. The news of foreclosures, a tough lending environment and lack of competition for affordable properties has made many stay away from the market altogether. And it’s tough to argue against today’s economic problems.
But there is one much overlooked segment of the real estate market that needs a second look by investors – the rental market. If you look hard and long enough, you’ll find some good deals and even some great possible investments. Apartment buildings have been a mainstay in many investors’ real estate portfolio and they are again.
For these reasons:
• Consistent cash flow from rents
• Growing resale value
• A strengthening rental market
Today’s investor needs to take a fresh look at the rental market and see that it’s time to get back in the water, so to speak, and take advantage of what this market has to offer. It’s absolutely the best time to get into the market and if you have the dollars to invest, apartment buildings are one of the best investments you can make.
In Los Angeles, there are a lot of buildings available, depending on the area and if you’re willing to look hard enough. There are some bargains out there with some very motivated buyers. And as you look, you’ll find more and more properties available for purchase. And it’s not just here in Los Angeles, but in Chicago, Cleveland, New York and a lot of other places where the apartment market is improving.
This isn’t rocket science. For me, it’s almost like a hobby because I love knowing the ins and outs of the market and I especially love finding great deals. But what it boils down to is that many apartment owners need cash and they’re willing to sell, provided you have the cash. That’s where you have to be prepared with these simple rules if you want to get into the apartment rental market:
• Be well capitalized
• Know how much you can afford
• Know if you can qualify for financing
• Be willing to be in it for the long haul
That last one is especially key because the real estate market in general is like a war of attrition. You have to be in it for a long time. You don’t really buy real estate so make a fast resale. It’s an investment that grows slowly, gives you cash flow and ultimately can give you a great return over a good period of time.
A good example is a four-plex, or four-unit apartment building in Los Angeles which I handled recently that was acquired for $225,000. With repairs estimated at $25,000, insurance and utility costs at $1,500 and $3,600, respectively, and property taxes at $4,275 per year, the annual expenses for the property totaled $9,375, and that gives you an annual return of 10 percent, all based upon total income of $34,500 in annual rents from the property.
It’s a great return, especially in a bad economy. And this isn’t unusual. It happens all the time in this market.
Although rental occupancy rates dipped during the early part of the recession as people moved out of apartments to live with their parents or other family, many are now back in apartments and things have improved significantly since then. According to the National Association of Realtors' February report, the rental occupancy rates in the U.S. will likely go down from 4.7 percent in the first quarter of this year to 4.5 percent in early 2013.
All this is good news for investors. With rental occupancy rates improving and the inventory of apartment buildings growing, the rental market is one of the best investments available today. But be sure to do the fundamentals when considering a property. Run a cash flow model, figure out maintenance and associated costs, research property rents in the area by going online, and figure out your annual revenue and buy based on the current conditions, not on what you think the conditions will be in the future.
A major mistake many make is putting too much money into needless improvements. You don’t have to make the building into a palace. Don’t buy expensive fixtures and fancy moldings because it’s money you probably won’t get back.
But do your research and contact a pro like myself, who will walk you through what you need to know before you jump into a market that you may be unfamiliar with. The opportunities are there for the potential investor and it’s time to take advantage of this little-known segment of the real estate market.
David Rosenfeld is a real estate broker and president of Advantage Real Estate, a real estate and investment firm in Santa Monica. He has more than 20 years experience in commercial and residential property investments and financial counseling.
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