Real estate for the post-Lehman market.

January 25, 2012 6:54 AM

What are the best markets in the US for securing rental income from real estate?

Real estate prices have hit the skids, and price appreciation on any investment seems like a distant dream. However, people are still renting units in apartment buildings, and compared to returns from money market and bond funds, which are often below 5%, the rental return on a duplex, fourplex, or multifamily apartment building seems more than acceptable.

However, earning a consistent positive cash flow on real estate can vary widely due to market and regional issues. States in the Northeast have rent control or rent stabilization laws. Other states and cities suffer from high vacancy rates. Still others are plagued with municipal red tape that bites into cashflow, or are burdened with high utility bills.

Assuming that one or more of these negatives will be present in any deal, what are the best places in the US right now for making money from real estate--not by flipping properties, but by securing a consistent cash flow?

posted by Gordion Knott to work & money (13 answers total)

College towns? There must be money in it, otherwise we wouldn't have so many new apartment blocks just outside campus...

(Obvious disclaimer: financial advice on the internets is pretty much worth what you paid for it.)
posted by RedOrGreen at 7:24 AM on January 25

States in the Northeast have rent control or rent stabilization laws.

Actually, it's more like some cities in the Northeast have such laws. New York is the classic example. There's a state law that permits cities to implement rent control/stabilization or not, and out of the 932 towns and 62 cities, 51 participate. Those include NYC, Albany, and Buffalo, some of the biggest cities in the state, but it's far from the dominant legal regime state-wide.

Further, rent control has been ended in Boston, but it still exists in Los Angeles, San Francisco, etc.

So while rent control is obviously an issue where it exists, I wouldn't say that the Northeast is any worse, on the whole, than the West Coast.

I know a few landlords, and they'll tell you that college towns tend to be good places to own rental properties. There's a steady stream of relatively affluent (or at least solvent), more-or-less responsible tenants who tend to be without kids or pets, who aren't all that price-sensitive.

But really, real estate is such a location-sensitive market that it's almost impossible to give general advice. Different neighborhoods in the same city, let alone towns in the same state, can have radically different real estate markets, and even the same neighborhood can have a radically different rental and freehold market. You should get in touch with your city and/or state's landlord association and do some real research, as this question is so broad as to preclude any genuinely helpful answers.
posted by valkyryn at 7:30 AM on January 25

I'm not a landlord or a real estate investor. But if I were looking to do this, I'd start with markets that were hit hardest by foreclosures and falling real estate prices over the last couple of years. I'd expect these to be places where there is (1) a glut of housing stock available, so it should be comparably cheap for someone with cash on hand to buy, and (2) a large population of former owners who now must rent, which ought to drive up rent prices. I'd probably start by looking at middle class neighborhoods in South Florida or something.
posted by dixiecupdrinking at 7:46 AM on January 25

College towns would be the first place I'd look. Just as an anecdotal example, here in Austin, our occupancy rates are very high and rents keep creeping up from the combination of lots of college students and being a hip place to live for the young (who don't want to and probably couldn't buy property) even as the real estate market as a whole is still pretty depressed.
posted by Ghostride The Whip at 7:54 AM on January 25

There are a number of ratios, like the price-rent ratio, that express the general relationship between the cost of buying housing and the rent paid. A site, like this one, that compares the ratio across cities may be a good starting point. I think the NY Times did a similar story recently.
posted by Homeboy Trouble at 7:59 AM on January 25 [1 favorite]

College towns? There must be money in it, otherwise we wouldn't have so many new apartment blocks just outside campus...

At least in my college town, those new apartments are because the city government finally eased up on zoning. From the small set of college towns I've observed, it appears that the mix of one dominate state employer and a large transient non-voting population makes for city councils that favors incumbent landlords. Things like zoning law and limiting the number of unrelated roommates. So when a policy does flip, there's lots of pent up demand, and you'd be wrong to assume that growth rate will be sustained.

Other caveats:

* Those big apartment complexes are privately owned and operated, and funded by commercial loans with no intent to sell. If you want to buy and rent a duplex, be aware that at least in this town these are prime takeover targets for demolishing and replacing with high density housing. Very much like monopoly.
* We recently had a rental inspection law passed, repealed after some college kid spent a night in jail.
* Education is counter-cyclical. Until the economy picks up demand for education will be high. So if you buy in a college town right now, you risk buying high and selling low later.
* I figure managing real estate is more profitable than owning it.
posted by pwnguin at 8:24 AM on January 25

I had some acquaintances who had invested in real estate in a very impoverished neighborhood. They bought individual apartments and then rented them to very poor people for three or four times the mortgage payment.

This has a lot to do with the buyers' credit and ability to secure a low payment mortgage, and also the desperation of the very poor. When you need to move into an apartment with no deposit, where the utilities are all in the landlords name (and those are included or added on separately, I can't remember) because you can't get the utility companies to open an account for you, you pay more money.

Do I think this is ethical? Not really. But those apartments paid for themselves in 2 years, so now any money coming in from them is profit to the owners, which supplements retirement. You do have to be very handy at fixing things/able to get a good deal on used appliances for when things die/be prepared for tenants to move out with your appliances.

Bear in mind, very poor neighborhoods have the stigma of high crime and revolving tenants/theft/etc. Folks who may be leaving in the middle of the night with no forwarding address. But some of my former acquaintances tenants had lived in the same apartment for years, faithfully paying rent early even. (She did express that she wished she reported their on time payments to credit bureaus, but she never actually did it.)
posted by bilabial at 8:25 AM on January 25

(that is an anecdote, the plural of anecdote is not data.)
posted by bilabial at 8:26 AM on January 25

Military towns have fairly transient populations, and there's a decent rental market in each one I've been to. You also generally have the recourse of talking to your renter's boss if things go south.

Pros: regular paychek, steady work, population of renters to draw from
Cons: you'll have to honor the 'military clause' (orders to a new base voids the lease), potential for bad effects due to demographic profile
posted by the man of twists and turns at 9:23 AM on January 25

check out Tuscon, Arizona
posted by parmanparman at 11:24 AM on January 25

They bought individual apartments and then rented them to very poor people for three or four times the mortgage payment.

To be sure, rent is generally determined by comparable units in the same area, not what you paid for the property. (Indeed, tax advantages can even make it worthwhile to take a cash loss on real estate.) I consider myself an ethical landlord, and I don't give a second thought to charging the going rate.

Unethicality in landlording is generally found in other areas such as stiffing people on security deposits, skimping on maintenance, Section 8 fraud, and so forth.

by securing a consistent cash flow?

I'm not sure I would say you could do this absentee. It generally requires knowing your market and target audience well. I'm also not sure why you couldn't necessarily do this where you are now, unless you're planning to move. But then, having had some negative experiences, I'm not very supportive of absentee landlording, period.

Most larger cities have a published rental vacancy rate; you, of course, want a low one, probably 5% or less, though where I am it's as high as 20% depending on unit size. Here are a few cities to avoid.

Your big problem as an investor/absentee landlord is going to be finding a solid building that has few maintenance/upkeep issues in a good neighborhood that will stay as full as possible (although adjusting your rent up or down to market is always advisable). You'll be competing with local landlords or those with agents who can inspect the sites and perhaps already have market experience. Something you buy sight unseen could have literally hidden problems, overpriced, and/or a poor market outlook. College towns, for instance, probably have a lot of institutional competitors who have half the market tied up between them. Even my average non-college city's big two rental neighborhoods are dominated by about half-a-dozen landlords who own dozens of properties each. Getting a good one out from under their noses is going to be a bit of a gamble.

Anyway, if you're seriously thinking of doing this, I'd start small and local until you get a much better idea of the combination of advantages and disadvantages.
posted by dhartung at 12:44 PM on January 25

Pittsburgh, PA. I live in a part of the city where large old Victorians get chopped up into several apartments. My current place has five apartments, which I'd say range from $500-$800 a month. I'm pretty sure the landlord is netting about $3000 a month just from this one home, and he has several. When I've looked at homes in the neighborhood for sale, the nicer, more well-kept Victorians run about $250,000. Not counting the maintenance (which has a cost of $0, if you're my crappy landlord!) and the cost to chop up and equip an old place that's still a single-family home, you'll make back the original $250k in less than 7 years. If I were planning on staying here long-term, slum landlordship would definitely be in my plans. (Oh yeah, and when I was looking at places, some of the apartments got snapped up between my making an appointment one night and going to look at the place the next day, so I don't think it's too hard to fill vacant apartments.)
posted by jabes at 4:36 PM on January 25

College towns and military sites and NOT what you're looking for. Turnover is the quickest way to lose money in the rental market, long-term tenants are where you make your profit. Here's the MSN list. Here's Zillow's picks. However, it's extremely difficult to manage rental property from a distance, and property management fees will cut deeply into any profit you might have. This is not an easy business to run, even though it really does look that way from the outside.
posted by raisingsand at 9:44 PM on January 25