Mom and pop investors like the Basilis are snapping up homes and condominiums to rent out all over the country. They're capitalizing on a confluence of events: depressed home prices, rising rents and strong rental demand. A typical plan? Buy cheap. Collect rents to cover costs. Cash out — one day — when home prices recover.
"An unprecedented number of investors are looking into this," says John Burns, CEO of John Burns Real Estate Consulting.
Investor purchases are strengthening demand in a still-weak market for home sales. Through the first nine months of last year, investors bought more than 26 percent of single-family homes and condominiums sold in 167 U.S. markets, indicate data tracked by Burns.
That's up from 21 percent in 2007.
Even the U.S. government wants to capitalize on a strong rental market. It recently started a pilot program for investors to buy and rent out foreclosed homesowned by government-backed mortgage giants Freddie Mac, Fannie Mae and the Federal Housing Administration. Together they own more than a quarter-million single-family homes.
In a recent paper, the Federal Reserve noted that "small investors" are buying foreclosed homes and converting them to rentals. It also said that larger investors were struggling to do so, in part because of tight financing and their inability to buy enough properties in the same area to make it worthwhile.
"Right now it's just that perfect storm for mom and pop investors," says David Hicks, co-president of HomeVesters of America, known as the "We Buy Ugly Houses" company.
A multiyear investment
As with any real estate buy, good timing is key.
Jason Huerkamp, 35, a Coldwell Banker real estate agent in Minneapolis, got especially lucky.
He and his wife, Brooke, cashed out some stocks in 2006 to buy rentals in their former college town of Mankato, Minn. Nothing panned out, and home prices started what's turned into a five-year fall.
"That was dumb luck," Huerkamp says.
In 2009, the couple bought their first rental. "That was probably premature," he says, as home prices dropped further still.
Since then, the couple have bought four rental homes, plus a duplex. They paid $310,000 for the properties and spent $90,000 to fix them up.
Now, they take in about $7,100 a month in rent and clear about $2,700 after expenses, including financing costs.
While home-loan financing has tightened since the go-go days, the couple secured loans for all the rentals. They did have to put 20 percent down. Their interest rates are also higher than for owner-occupied homes. At today's rates, that might mean a 5 percent rate vs. a 4 percent rate.
Assuming home prices rise in three to five years, Huerkamp says the couple hope to sell the homes at a profit and buy small apartment buildings.
"By the time we're 60, we hope to have 60 doors (rental units) and make that our retirement lifestyle," he says.
That buy-and-hold mentality is now common among investors buying homes, says Zillow economist Stan Humphries. Unlike "flippers," who quickly bought and sold homes for a profit when prices were soaring, the buy-and-hold investors intend to keep properties for years, Humphries says.
Rental markets vary by city. An 8 percent annual return is now about the norm, with some markets higher and some lower, Burns says. That means that someone who buys a $100,000 property — and pays cash for it — makes $8,000 a year after expenses, including maintenance and taxes.
Given today's tight financing, Burns says, many rental properties are purchased with cash. Many banks will also lend to investors, assuming they have good credit, for three rentals in addition to a primary home, Hicks says.
The soft costs
The Basilis' experience as landlords has also been positive, so far.
They rented both units quickly, one to a friend of a friend. The young professional renters pay on time. Except for a busted microwave and broken refrigerator, the units have been largely hassle-free.
That isn't everyone's experience, and a "fair number of people aren't cut out to be landlords," says Eric Tyson, co-author of "Real Estate Investing for Dummies."
Landlords not only have to be tough enough to evict people — even families in the dead of winter as Huerkamp had to do — but to take midnight calls about broken plumbing, confront late-paying tenants and live with a heightened risk of legal hassles.
They also have to be able to "crunch the numbers," Tyson says.
Paying too much or underestimating the cost to make a place rentable can sink even cautious investors.
Then there's the risk of deadbeat tenants.