Rental Real-Estate: Becoming Nobody’s Game?

I am working on a financial model for a rental home business. The basic concept: buy a house, fix it up, and rent it out. I have run the numbers using a few different financing options and so far none of them produce a sustainable investment model.

The basic model inputs are:

• Home Value
• Loan Amount
• Interest Rate
• Monthly Rent
• Monthly Maintenance
• Annual Taxes

Tweaking those values within a reasonable range doesn’t produce a positive cash-flow company.  The real way to make this work out is to lower the home value (and loan amount) to below market prices for my target markets.  So, this puts me in the position of trying to find properties in this price range.  There are none in my neighborhood for sale (bank-owned or otherwise), nor in the neighborhood next to mine.  I don’t think any of my valuations are outside the range of believability.

This leads me to several conclusions:

• Home values can still drop a long way.  If properties aren’t rented for what the market rental rates are, then something needs to give.  Also, if I am a tenant and pay less than my landlord pays, I should really start to worry.  If I’m that person, I might think twice when renewing my lease.  The landlord is now worse-off because a vacant property produces no income.
• Current investment properties are not going to change hands soon.  There’s no reason to futz with any house that is generating net positive income.  If someone is doing this with a recent purchase, good for them.  House values have fallen enough that it doesn’t make sense for investors to sell, and as long as rent checks continue coming in, there’s no reason to take drastic steps.
• Rental companies like Post Properties (NYSE: PPS) may see an increase in rentals.  If the only practical way to generate rental income is to own the entire supply chain (from property acquisition, through construction,  to rental), then only major companies who have access to the necessary capital markets will be successful.

I’m sure someone has figured out how to do this other than light night television marketers.  I don’t think I made a bonehead mistake in my financial model, but I can’t figure out how to make this profitable.  Even if I factor in the depreciation of the house, it continues to go negative.  Am I missing something, or is it becoming impossible for the individual investor to make money by buying and renting homes?

Note: I picked up a copy of The Intelligent Investor a couple of days ago.  I am slowly working my way through the book and hope to become more intelligent at investing.  Any stock transactions I make today are really just “speculation” in the eyes of those that practice value investing.  I’m comfortable reading through a company’s financial statements thanks to my MBA program, and I’m good at thinking through business logic, but I still see the stock market as this other entity and I struggle to make sound financial transactions.  I’m at the point where I know how much I don’t know and need to educate myself further.