Here are three hard-boiled facts of life for real estate investors in Metropolitan Phoenix:
1. Despite the ridiculous hoopla in the newspapers, there is no shortage of foreclosed homes. FannieMae and FreddieMac imposed a four-month moratorium on new foreclosures, which resulted in the false perception of a shortage. The moratorium ended on April 1, and inventories are surging.
2. Hence, there is no sane reason for an investor to get mixed up in a bidding war for a particular property. If you can’t buy what you want right now, you’ll be able to get something better for less money a month from now. You don’t need to — and shouldn’t — buy the cheapest rental property out there, but there is no need to overpay for anything right now.
3. There is no viable tenant base in Queen Creek, Maricopa or Buckeye. Investors fixate on those towns because the homes are so cheap. They’re cheap for three reasons: They’re half vacant, they’re more than half lender-owned and — most importantly — there are no jobs to speak of in those towns. No jobs means no reason for tenants to live there, which means no rents for landlords.
Those three towns — Queen Creek, Maricopa and Buckeye — are the poster children of the real estate bust. Out-of-state investors got suckered into buying rental homes there in 2004 and 2005, which homes comprised much of the first wave of foreclosures in the Valley. Now a second wave of suckers are snapping up super-cheap homes in those remote locales, even though there must already be at least a dozen vacant rental homes for every marginally-qualified tenant.
Here’s the hard, cold truth, and it’s a lesson every landlord has to learn: Residences without residents have no value. The price you pay on the way in matters, yes. The price you collect on the way out matters, too. But what matters most is whether your rental home covers its own costs — ideally throwing off positive cash flow — while you own it.
Emphasize that: It doesn’t matter how cheaply you bought it, and it doesn’t matter what the theoretical Gross Rent Multiplier might be — if the home sits vacant for months on end.
So who is at fault when a Realtor helps an out-of-state investor buy the wrong rental property in the wrong town? Is it the Realtor, who should have put his foot down? Or is it the investor, who insisted upon buying the cheapest possible property, even though the cheapest homes have no commercial value right now?
My answer is that I don’t care. I don’t work with investors who can’t figure out which side of the bread has the butter on it. I sell rental homes in towns with a strong jobs base, abundant retail and entertainment, decent, nearby schools and adequate transportation services. In other words, I work in towns — and in specific neighborhoods — where tenants actually want to live, where rental homes stay rented, and where they sell for premium prices to owner-occupants on the way out.
Here’s the kick in the teeth: Even in these premium neighborhoods, lender-owned houses are still amazingly cheap. The homes I sell are cash-flow positive from the first tenant, and acquiring that first tenant is normally quick and painless.
Owning rental housing is a business — and not an easy business. The objective is to make money. If you want to find out more about how to make money on buying lender-owned homes and converting them to rental properties, assert yourself.
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