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Scott Askew's Blog

By Scott Askew | Broker in Atlanta, GA

The Economics of Buying Rental Properties

So you want to become the next titan of real estate and own a lot of rental properties! Afterall, prices and interest rates are down and you’ve heard from your buddy’s second cousin that he is making a killing with the high rent rates tenants are paying today! So how do you go about buying these mecas of prosperity, and where?

Cutting to the chase - work with an agent who actually understands what an investment property should do FOR the investor (not TO the investor)! The simple answer to the question - Is it possible to find a good investment in Atlanta? is “yes,” but it’s not that easy to find a property that can provide enough rental income to cover all carrying costs while also being easy to convert into the owner occupied market once the housing market has recovered.

Here is ‘Consideration Number 1” that affects the risk in making such an investment:

Rent to Value Ratio (Rental Yield)
The ratio of rent to value can be a valuable guide and a requisite part of a thorough investigation of an investment opportunity. The thought behind this ratio (12 months of rent/home price), called “rental yield,” is that it is akin to the earnings-to-price ratio in the stock market: higher earnings, all else equal, are associated with more profitable investments and are less reliant upon future growth in the stock price to generate expected returns.
The same notion applies to the rental yield: higher rents make it less important for the property to appreciate in value in order to meet a certain expected return target set by the investor. However, rental yield alone, like the classic earnings-to-price ratio, is not a guarantee for a successful investment. It is necessary to look carefully “under the hood” at other considerations. Things such as anticipated repairs/improvements, vacancies, unanticipated repairs, etc must be factored into the decision! This is where many fail! Studying these likelihoods makes clear that there is no single rental yield that should guide all investment decisions.

Comments

By Jennifer Ratcliff,  Mon Jul 2 2012, 14:13
Great info Scott!
By Kerry Lucasse,  Sat Jul 7 2012, 12:22
Excellent advice, Scott. It's definitely not as easy as many people think.
 
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