Excerpt: From How to Invest in Rental Properties

The Least You Need to Know: Your Local Markets
     You can’t learn everything there is to know about investing in rentals in a few short months. As the title of this chapter, Real Estate Investing 101, suggests, it is an introduction to the topic. Reading this book will be just the beginning of a lifelong education in real estate. You will have to keep learning about your market. What was true about the market in June is not true by December.
     To get started, you need to learn about three things: your local rental market, your real estate sales market, and some of the jargon of the industry.

Your Local Rental Market
     When I say you need to know about your market, I don’t mean you should be able to quote, off the top of your head, the high and low rents for a one-bedroom apartment this week. You should, however, know both what the general range of rents is for units in various parts of town, and what the current trend is. Is the market in each area going up, going down, or staying flat? You need to be a trend spotter.
     How do you learn about the rental market? Fortunately, you can do some of your initial homework sitting on your deck, with your feet up, and a cup of coffee in your hand. Your first source for rental information is your local newspaper. Read the rentals-available section weekly; most rental ads appear in weekend editions. Property owners with rentals to let communicate with prospective renters through the newspaper. You should be eavesdropping on that conversation.
      After you’ve studied a couple of weekend papers, you will begin to develop a sense of what your market is doing. Signs of market stagnation include ads stating first month free, no deposits, move-in specials, and summer rates! The more of these phrases you see in the ads, the more depressed your local rental market may be. Signs of a hot rental market include ads specifying no pets, no Section 8, and one-year lease.
     The market drives rents and the conditions of renting–leases, deposits, pet restrictions. When there are more renters than vacancies, property owners can be selective. They impose high rents, high deposits, and other conditions that allow them to increase their profits. When the market is soft, landowners may be virtually paying renters to sign up or to stay longer. A vacancy rate above five percent is considered a good market for renters, but a poor market for property owners. A market with less than five percent vacancies is considered a tight market for renters, and a good one for rental owners.
     When you are ready to compare rents and amenities among the kind of units you’re interested in, it is time to go directly to the sources by attending rental open houses and calling the phone numbers listed in rental ads. You can make phone calls from home, just as you can read the newspaper on the deck. Call the number listed in an ad and ask the questions you would ask if you were a prospective renter:

• How big is the unit ?
• What appliances are included?
• What utilities are included in the rent?

     Type up a list of questions before you call and make multiple copies of it. Then fill in the information on each unit you call about. This way you will collect all the pertinent information on each unit.
     More and more, landowners and management agencies hold open houses to solicit tenants, especially in soft markets. They often provide a flyer containing the information you want. If your questions are not answered by a flyer, you have the list you prepared for your telephone research, so you are primed with questions.
     You want to be a trend spotter. You need to develop a sense of how rents change according to the size of the units, the amenities, and location. Do property owners in your area normally pay all utilities, or just water, sewer, and garbage? Is it the norm in your area for renters to pay for their own cable service, even in larger complexes? What are the usual deposits, refundable and non-refundable? Do most rentals accept pets or not? Do most land-owners require a year-long lease, or are rents month-to-month? You may choose to place your own rentals outside the mainstream with regard to some of the trends. But you need to know where the mainstream is, so you can calculate your risk in adopting practices that are not standard for your area.
     If you have never gone shopping for an apartment to rent, telephoning and visiting advertised units will be an education. Not only will you develop your financial knowledge, you will begin seeing the breadth of the market. You will see units you wouldn’t live in if the owner paid you, you will see units you couldn’t afford to rent at twice your income, and you’ll see everything in between. It will be eye opening, and it should be great fun.

Your Local Sales Market
     After you’ve surveyed the market for rental units available in your area, you’re ready to take a look at rentals that are for sale. You may have established some idea of the sort of unit you can afford and would enjoy owning just by driving around or visiting open houses. Now you are ready to check out prices on properties you’d like to own.
     Rental complexes of more than six units seldom show up in the for-sale section of newspapers. Commercial brokers cultivate life-long relationships with the people who buy, hold, and sell these properties. Before a broker advertises such a property, she will have called everyone on her list to see if a current client is interested–another reason to develop a relationship with at least one commercial broker.
     Rental properties of one to four units are often advertised in newspapers and real estate sales booklets. You should be reading all the brochures you can find. A good way to educate yourself about your local sales market for these properties is to prepare a table with your targeted neighborhoods across the top and listings from newspapers and brochures down the side. Newspapers often list the address of the property for sale; brochures may have either addresses or MLS (Multiple Listing Service) numbers. Enter information from each Saturday and Sunday newspaper and from all the real estate brochures you’ve gathered.
     By the time you have accumulated four weeks of information, you will know more about the prices of units in your target areas than most real estate agents in town. You will also have learned what the range of listing prices is, whether prices are changing and in what direction, how fast rental properties are selling, and which neighborhoods you can afford to buy into.
     Attend open houses for rental units that are for sale. Many mortgage companies provide information sheets at open houses describing the interest rates and terms they are prepared to offer to qualified buyers. If a loan officer is present at the open house, introduce yourself and say you are starting to think about investing in rentals. Find out what kinds of financing the lender he represents has available. Open houses are good places to make contacts and expand your network. See if you can answer these questions using the table you’ve created:

What do the various configurations–two units, four units, or larger–sell for in your target locations?

• How do prices for older buildings compare to prices for newer buildings?
• How do the conditions and amenities compare?
• What kind of financing is customary in your area?
• What is the current trend–have prices been going up or down in the past six months?
• Can you make any educated guesses about how the trend will continue, and for how long? 

The list of questions you will want to answer is much longer, and will be developed in Chapter Seven. For now, you are primarily interested in gaining a sense of your local market, so you will be prepared to focus on a few properties to analyze in detail before you are ready to purchase.