Sweet spot for real estate? Rental homes

The rental market is continuing to heat up and can offer potentially big returns for buyers willing to jump into the landlord role.

For investors looking to take advantage of low record-reaching mortgage rates and big discounts on home prices, the opportunities are plenty.

Rents are rising and demand is up too, partially due to the four million former homeowners who’ve faced a foreclosure and are now renters.
In response, more homes are turning into rentals: Nearly 35 percent of occupied homes were rented in 2010, which is a 33.8 percent increase from 2000, according to a recent study.

In more than 500 cities, demand for rentals has increased, with vacancies for rental housing reaching its lowest level since 2003, according to U.S. Census data. Plus, rents are on the rise too: Nationwide, rents increased 11.6 percent in 2010 to $1,320 a month, on average, according to Hotpads.com, a real estate research firm.

Investors are buying rental properties with the intention to hold onto it for a longer time too: On average, investors say they plan to hold onto the property for 10 years before selling, according to a survey by the National Association of Realtors.

“Whereas leverage is dangerous when buying stocks, (buying a rental) can be a good long-term strategy with real estate,” real estate investor Marshall Sonenshine told Money Magazine.

Experts suggest the wisest move for investors is buying a property nearby their permanent residence and sticking to buildings with four units or fewer to avoid stricter financing requirements, such as larger down payments and higher mortgage rates.

Also, experts say rental income should cover at least the mortgage payments on the property as well as an extra 20 percent cushion to pay for any repairs, property management, or get you through any vacancies.