While browsing the likes of Zillow.com I find many US residential properties for sale that offer 20% annual rental yields! whats the catch?

Every time I browse residential real estate for sale in the US on zillow.com I become more fascinated with the returns some of those properties offer, for example this gem right here (http://bit.ly/1OeE2A7) is selling for $62,000 and is renting for $1,200 a month which means that it is producing an annual rental yield of around 23.2% [($1,200*12mo)/$62,000]! This is insane given that the stock market which is much riskier barely makes half that return on an annual basis, and what is more insane is the fact that mortgage is cheaper than rent! Which means one can buy a house and pay out its mortgage with the collected rent and keep some change too and voila in 3 years the house is yours and all you had to do is put a marginal down-payment and maintain a healthy credit score!

and since this is too good to be true, whats the catch? is it:

A) Taxes and fees eat up my returns?
B) There are occupancy issues so properties can go vacant for months on end?
C) US law makes it very difficult/impossible to throw out a defaulting tenant?
D) A lot of people have bad credit scores and are forced to rent as opposed to get a mortgage?
E) All of the above?
F) If none of the above, then what?
(0) | asked by: Mohammad Masoud | share | 16 months ago | Report
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answer by Aaron Stein    |   Contact Me
I would say definitely, all of the above. Property taxes in most areas aren't enough to eat in to your profit margin too badly, but other costs, such as vacancy, non-payment from tenants, repairs that aren't covered by security deposits, etc. can certainly be an issue at times. Truth of the matter is, though, that many people who rent don't realize that it is often close to the same if not cheaper just to buy a house. All that being said, investment properties are still an excellent way to earn additional income.
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16 months ago  |   Report   |   share
answer by Meshyalah McElhaney    |   Contact Me
Mohammad, I am not sure what state you are browsing on but those return rates do seem a bit high. I am in Utah and we generally have 1-3%ROI for rental properties at the most. Taxes on a $62,000 property would be less than $75 per month and your initial fees are about roughly 3% of the purchase price. Depending on where you live it can sometimes be difficult to get poor tenants out in a timely manner. Where i am you would be lucky to find a decent home in a super rough neighborhood for under $125K so I could only imagine what a $60K neighborhood looks like. If you are in a rural area it could be possible but then finding tenants to occupy would be difficult as no one here wants to live out in the sticks. And finally yes credit issues are a big problem. Many people bought at the height of the market a few years back when financing rules were laxed and suffered from it, so as they are rebounding renting is their only option. Again I don't know that area you are finding such possible investment properties but I would be highly skeptical 1) of the websites claims and 2) the possibilities of such an inexpensive home renting for such high amounts.
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16 months ago  |   Report   |   share
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