Is Central Alabama’s residential rental market where the smart money lives? Get insight on the pros and cons of this real estate investment from locals who are landlords.
Investing in rental property can prove lucrative in both the short and long terms and be a valuable tool for building wealth. It pays you passive and recurring monthly income. Plus, down the line, if you made wise choices when buying, you may be able to sell your properties for more (sometimes much more) than your purchase price. But, like all investments, it comes with risks, and being a rental property owner has challenges too. We asked Central Alabama real estate pros and successful rental property owners for their thoughts.
Around 34% of households live in rental housing. 42% of those live in single-family homes, while 36% live in apartments with five or more units. Almost half of renters are under 30 years old.Source: BankRate.com
While the housing market is cooling a bit, both nationally and locally, home prices remain high. But, so do borrowing rates. Raised interest rates are a double-edged sword for rental property investing. They mean it costs more to buy and own a rental house. On the flip side, high rates also keep others from buying homes, which eventually drives home prices down. Financial news stalwart Kiplinger also points to good things for rental property investors in the near future, reporting an uptick (from 3 percent to 12 percent in 2022) in new homes being built specifically to be rented.
Times could be changing though; other numbers show rental demand starting to weaken. October 2022 was the third month in a row where rental rates went down, according to a report from Apartments.com. According to Bankrate.com, in 2022, the profits on single-family home rentals fell in 72 percent of the counties in the United States. The picture at the local level seems a bit rosier. Carol Bowman, a Realtor with Lucretia Cauthen Realty, LLC who’s been in River Region real estate for five years, calls the rental market in our area “strong” and says it derives its strength mainly from the presence of the Air Force base in Montgomery, as well as the successful recruitment of businesses with jobs that draw newcomers.
“The rental market serves many military families coming to Maxwell-Gunter,” she said. “Also, people moving to the area for the first time for new jobs prefer to rent first until they learn the area and then buy a home.” While a steady stream of military families is good news for rental property investors, for other local renters, it’s not always a plus. According to Veteran.com, the monthly housing stipend provided to military officers with families at Maxwell-Gunter AFB ranges from $1,995-$2,250 per month, and there are often complaints that this drives rent rates up, decreasing affordability and options.
It can be tough to know which statistics to trust, so many experts suggest putting your energy into finding the right house in the right spot for the right price instead of trying to “time the market,” a difficult feat for even the most seasoned real estate pros. And right spot is an important piece of the equation. Just like a house you buy to live in yourself, one fact never changes: the No. 1 consideration is location. (It’s actually Nos. 2 and 3 too!) It’s essential to understand the community and neighborhoods where you’re shopping for rental property.
Local rental property investor Deborah Dias stressed that there are exceptions to this rule. “I know people say LOCATION, LOCATION, LOCATION, but don’t decide for others where they may want to live just because you don’t want to live there,” she said. “They may care about being close to their family and friends, close to their job, close to their daycare, close to their church home, close to their school or within their budget. So, if the property fits your other criteria, I’d still consider buying it.”
She knows of what she speaks. Currently, Dias owns four townhomes, three of which are occupied; one four-plex, with three units occupied; plus three homes, two of which she’s transforming into duplexes, and three empty lots where she’s planning to place “tiny homes” for rent.
About 70% of rental properties are owned by individual investors, according to census estimates.Source: CNBC
Right for Me?
The money a landlord makes from rental property is called passive, but that’s not entirely accurate; it doesn’t mean you don’t have to do anything, and the rent checks just roll in. Landlords are responsible for at least some portion of their rental properties’ upkeep. According to Bankrate.com, property owners should expect to spend up to 1 percent of their property’s value on routine maintenance. Before you can offer it for rent, a property you purchase may need renovations, either basic repairs to make it livable or cosmetic upgrades to increase its appeal.
Local rental property investor Deborah Dias looks for homes in need of TLC, seeing them as opportunities. “I call my holdings ‘butterfly properties’ because of the transformation you’ll see from fixer-upper caterpillars to beautiful butterflies,” she said. “Even though I may fuss about how long it can take, I really enjoy that part of the process.” But she has been disappointed by the shallow pool of renovation help in our region. “I’m a bit surprised how challenging it has been to find solid, steady, dependable contractors,” she said.
Dias hasn’t let this stop her; she’s learned how to do many home improvements herself. The lesson here: If you’re not into DIY and the idea of chasing down contractors gives you angst, that’s a fact to keep top of mind when choosing properties for your portfolio. Once your houses are looking good, you need to fill them with occupants. If they sit empty, they’re not making you money; they’re costing you.
Bowman noted that “finding good tenants in our area is not difficult.” But again, there is effort involved. Actively marketing your properties is crucial. Dias uses the Affordable Housing website, which also lists on Zillow and other real estate sites, to put her available properties in front of potential renters. Bowman echoed Dias on using the internet. “People shop for everything online now, even homes. Post your home on sites that target rental customers,” she said.
But Dias goes low-tech too. “My daughter made me double-sided, customized ‘For Rent’ signs that I place in front of my units.” You want renters, but the right renters, as Dias explained. “It’s not necessarily hard to find good tenants, but you have to be patient to find those that meet your specific criteria,” she said.
She stressed the importance of a rigorous vetting process. “I require fully filled out applications, with names, addresses and phone numbers of current and previous landlords and employers.” When you’ve got renters moved in, you’re not done. When there’s an issue at a property (a busted pipe, a faulty light switch), you’re the one your tenants call to sort it out. And if a tenant gets behind on rent, you have to make tough choices.
15% of renters (nationwide) were behind on rent payments as of October 2022.Source: CNBC
Dias is glad she’s only faced the eviction decision once. “I try to work with tenants if they get behind, but they must show solid effort to get back on track. Good communication is key,” she said. You can take many of these tasks off your plate by working with a property management company, but they’ll take a percentage of your rental income in exchange for their services.
The answer to whether the rental market is a smart investment strategy for you lies in your answers to a few other questions, according to Dias: “What is your ‘why’? Is it strictly for immediate money? Is it for a long-term investment? Do you feel you have the temperament to deal with renovations, repairs, tenant relations, neighborhood surroundings, taxes, rental agreements, workers, property managers, etc.? Do you have enough money for the purchase price, renovations and the wait time it takes to get it rented?” she said. “You have to think through every piece of it to know if it’s a good fit.”
With multiple, diverse options in her residential rental property portfolio, Deborah Dias has built a successful business out of real estate investing. But her efforts are about more than making money. She describes the endeavor as continuing a family legacy. “My father’s parents bought a property in the San Francisco Bay Area at a time when people didn’t want to sell to Blacks. In fact, sellers didn’t even want to show them homes. Many times, my grandparents would have to have white friends preview the houses for them,” she said.
Eventually, her grandparents were able to purchase a duplex, and while they lived downstairs, they rented out the upstairs unit. “This was our family’s introduction to ‘income property,’” Dias said. When her dad grew up, he continued in his parents’ footsteps and bought a rental property. Dias stressed that he saw rental property investing as more than business. “In our family, rental property ownership was considered what today might be called ‘socialpreneurship,’” she said. Their motto was and hers is: Make it better than you found it and provide a beautiful, well maintained, good value property
To the Point: Local rental property investor Deborah Dias frequently buys properties in need of some TLC, but steers clear of those that need major overhauls. “I only buy fixer-uppers with little to no structural damage—no roof or foundation headaches, etc.,” she said.