Real Estate Investor Competition Heating Up – Sharpen Your Deal Pencil

Real estate investors have had a great ride for a half dozen years now.  The glut of foreclosures after the crash that began in 2007 provided over a million bargain basement deals, most ending up in the portfolios of rental property investors large and small.  Fix & flip and wholesale investors filled the supply line with rental properties, and rental demand is still quite high nationally.

When the big players like Blackstone Group jumped into the fray, thousands of properties went in block purchases and were converted to rental units.  All of this investment prosperity and activity has created a bit of a bubble in prices for the properties investors most desire.  Competition is heated in many markets, and this means higher prices.  Higher prices make it more difficult to make the rental cash flow work.  Today’s real estate investor, whether a wholesaler, fix & flip, or rental property investor, will need to sharpen their deal pencil and their negotiation skills as well.

Market Research

Knowing your market inside and out is a must.  Since markets are constantly evolving, market research is an ongoing activity.  Even real estate wholesalers and fix & flip investors need this information, because most of their customers will be rental property real estate investors.  Survey the rental market, call like a tenant prospect, and compare properties you’re considering to the current rental inventory.  Keep abreast of the local economy, major changes in business or industry, and the demographics of the average tenant who is a prospect for your unit.  Keep track of incentives being offered, as giving away a month’s free rent definitely takes down the annual cash flow.

Drive a Harder Bargain or Get There First

This is an “if you can” statement.  Competition is in the mix, so better marketing for distressed sellers could give you an early edge over competitors.  Working pre-foreclosures can help with a timing edge, but they’re well-covered at websites and in publications.  Getting the absolute best upfront price will help not only with cash flow but also with overall ROI when you sell.  One way to help in negotiations with distressed sellers is to have a firm handle on your financing so you can offer a fast close without hassles for a homeowner who is seeking escape from their situation.

Be Careful of Condition & Future Repair Budget

Many of the opportunities available in current local markets are older homes in well-established and popular neighborhoods close to city centers.  This is fertile ground for the real estate investor, but older homes require more maintenance and major improvements may need to be in the planning budget.  One sure way to get to the end of a rental property’s investment life and be disappointed in the overall ROI is to have spent more for repairs and rehab than anticipated through the live of the investment.

Build Rent Increases into Leases

Inflation never ends, though it can ease a bit for short periods.  Sure, you can just surprise your tenants with a coming rent increase, but that can backfire on you with move-outs and vacancy cost increases.  If you put a rent increase percentage into your lease, your tenants will expect it, which yields two advantages.  1) You can let it stand and offset inflation in your costs, or 2) To keep a good tenant you can offer to decrease or eliminate it for a renewal of their lease.  The key here is to have a good handle on your costs to rehab a unit between tenants and a good idea of how long it will be empty and not generating rent.

Expect Property Tax Increases

Rental property owners hold their investments for years, and governments over-spend every year.  Local government deficits will eventually lead to increases in property taxes, so a wise real estate investor will consider them in their budgeting and future need for increases in rent.

Don’t Be Discouraged

Rental demand is higher than at any time in recent history, and it’s still rising.  If you offer tenants good location, nice amenities, and competitive rent, you’ll enjoy near full-time occupancy and nice cash flow.  It’s just best to plan for cost increases and possible rent incentives you may not need now.  The rental property real estate investor enjoys tax advantages and generally lower risk than investors in other asset classes, so just get out there and make it happen!

MainStreet Realty Services is here to help both the experienced and the entry level real estate investor.