If you’re a landlord or real estate investor you might have mixed emotions
about the current national housing market. For people looking for super
bargains, now might be the time to accumulate some excellent properties
while home values are down. I know what you’re thinking. How can we be sure
we’ve really reached the bottom? The truth is, we can’t be. But still,
there’s an investing strategy that can keep you out of trouble during times
Before I go any further, allow me to clarify that statement. There is a
method that will remain safe for investors as long as we don’t see a
complete and total collapse in our economy. Barring such an event, what I’m
about to explain has allowed people to weather many real estate downturns
over the decades.
Buy and Hold
I’m referring to buying bargain properties and renting them. See, in many
markets where you find home values suffering, rents have stayed relatively
stable. That’s just one item of good news. The other is, as home values
continue to decline investors can obviously buy decent properties for much
less. This means debt service is cheaper, which, in many markets brings a
mortgage payment well under the average rents in that market.
I’ve been around long enough to weather several down cycles using this
approach. The first was the terrible real estate market of the early 1990s
in California. Prices had risen more than 50 percent in only a few short
years and I’d purchased a condo along with a single family home very near
the peak. My intention was to flip these properties for a quick profit but
the market went flat almost overnight. I was faced with two large mortgage
payments on these properties and no buyers. It was trial by fire. I was
forced to go into the rental business due to the severe drop in home values.
Riding Out The Storm
I was able to locate an individual who had just moved to the area with his
family from Atlanta, Georgia. He wanted a house, had some cash but also had
terrible credit. We worked out a lease option deal where he’d pay me a set
price for the home within or at the end of two years. He gave me $10,000 as
option money. His payment to me more than covered my mortgage along with tax
and insurance. I also credited $250 of each payment toward the purchase
This was a good arrangement for both of us, however, when it came time to
exercise his option to buy two years later, he still wasn’t able to qualify
for a loan. So I extended his option. This ended up happening every year for
eight years and finally, he was able to qualify and did close. The nice part
of the deal was that he’d paid my mortgage down $65,000 over the course of
the eight years. And when all was said and done we were both happy campers.
As for the condo, I simply rented that out on a month-to-month basis until
the market rebounded.
There are several key points to making this strategy work for you. You
almost need declining home values for this to work otherwise high-priced
markets will still demand higher mortgage payments. The other critical
factor in making this work is you’ve got to be a fair but strict landlord.
If you’re tenants aren’t paying you, this method will turn into the
nightmare from hell.
The best way to avoid negative situations such as this is to very carefully
screen your tenants before allowing them to move in. Most of the landlords
I’ve know who had problems with their tenants were people who accepted the
first warm body who showed up with first, last and a deposit.
They often took the first applicant so they didn’t have to come out of
pocket to pay the mortgage. In my experience it’s far better to have to
cough up a payment or two in the short term than to have nightmare tenants
in the long term. Now get out there and start picking up nice homes for
twenty-five cents on the dollar and get them rented out. When the storm is
over you’ll be glad you did!