Residential Leasing Trends and Your Investment: The Good, The Bad, and The Ugly

Investing in residential real estate can be riskier than investing in commercial real estate, but this doesn’t mean it’s a poor investment. Income-producing residential properties offer a number of advantages including:

• having a third-party (tenant) cover costs of your mortgage and taxes while you build equity
• residential investment is more accessible, with a lower cost of entry
• residential real estate has a built-in market – people will always need a place to live and property located in highly-desirable school districts can be particularly attractive to tenants
• financing for residential property can be significantly easier to obtain than a commercial property

If you’re ready to dive into the residential real estate investment market here are some key considerations – the good, the bad, and the ugly:

Financing. There are numerous financing vehicles available to fit nearly any investor’s pocketbook. Lease-to-buy, seller financed, and traditional bank loan are just a few options depending on the buyer’s financial scenario. Before you launch your property search, get pre-qualified to know your financing limits (how much a lender will let you borrow) and research financing options that best fit your financial scenario.

Do Your Research. Just because a property is affordable doesn’t mean it’s the right choice for you. Questions to consider include: Does the property warrant the rental rates you’ll need to comprehensively cover costs to maximize your investment? Is the neighborhood walkable or near to amenities and other things that appeal to renters? Are the schools desirable? What’s the crime rate in the area? Have rental rates in the area been stagnant or are they trending up? Overall, is the area one with a high vacancy rate? There are so many considerations.

While there has been a trending uptick in home ownership throughout the nation, every major market still relies on the strength of residential rental properties both to house people who are dedicated renters and those who can’t afford to purchase their own homes. The answers to these questions are essential to determining if a property is right for you.

Understand the Closing Process. When purchasing real estate, you should close with a title company and obtain title insurance. Title research is important to confirm that you are purchasing the actual property you intend to be purchasing, the seller owns the property, that there are no mortgages secured by liens against the property, and that the taxes are current and paid. It’s not uncommon for desirable investment properties to require title curative work prior to purchase as lower-priced properties may have transferred through multiple parties through generations of intestate succession. It’s imperative to confirm that you’re obtaining 100% ownership interest in the property.

Tax Advantages. The possibilities are as endless as the ideal investor profile. Your own individual circumstances will determine your ability to take advantage of deductions to make your property even more profitable while you’re creating wealth.

Building Your Portfolio. Real estate investment is often a long-term game to see profitable results. Be prepared to weather economic fluctuations and other circumstances beyond your control and remember, your goal is to building equity and that often takes time.

Be Aware of Your Cash Reserves. Whether you have one property or 20, having enough cash on hand to deal with maintenance and repairs as well as other unforeseen situations, such as a temporary reduction in rental income, is essential.

Curb Appeal. Your cash flow is 100% dependent on the ability to lease your property for the highest rent. Both leaseability of the property and quality of tenants are paramount. Purchase wisely and vet tenants with discretion.

Your Pain Tolerance. Do you have the risk tolerance to weather unforeseen, catastrophic events such as COVID-19, natural disasters, or recessions that may surface and affect rentability? In the wake of the coronavirus, the rental market has definitely taken a hit and programs like mandated temporary eviction moratoriums limit recourse of landlords. What if the majority of your tenants become unemployed and can’t make their obligations? It’s essential that you be prepared to manage and ride out disruptive occurrences.

As with any investment, take the time to research all the options, risks, and rewards of owning rental property. Ensure you are knowledgeable and prepared to act wisely to protect and enhance your real estate investments.

Contact Cassie McGarvey with your Texas real estate questions today. Cassie is double Board Certified in commercial and residential real estate law in the state of Texas.