All real estate investment purchases are not the same. The due diligence you do for a rental property may not be the same as one you are looking to rehab. With a rental property purchase you are looking to make an addition to your long term portfolio. This requires an intimate understanding of the current state of the local market and where it may be headed. With a rehab you are in and out of the property within 30 days and not as exposed to market shifts. A well performing rental property is one of the foundations of long term financial security. This starts with purchasing the right property. Here are a few things to look for in a rental property purchase.
- Market. With a rental property the market is often more important than the physical property itself. Most tenants that rent your property will do so for the location rather than the amenities offered. Before you purchase you need to take a big picture look at the market. You need to know everything about the local school systems, unemployment rates, foreclosures, crime statistics, new housing permits and everything else you can find. A large corporation leaving the market means a loss of jobs for the market and a less desirable area to live in. Conversely an area with a booming economy is one that renters may flock to. Take a look at local print publications and see if there is anything new for the market on the horizon. Go to town hall and look at the tax rates and see where they are trending. Most rental property purchases are done so with at least a three to five year plan in mind. How strong the market is often a reflection on how well the property is performing.
- Understand all numbers. Before you get too far with your rental purchase you need to know and understand all of the numbers involved. These numbers will directly dictate what kind of property you have. You may personally like the property and have an emotional attachment to it but if the numbers don’t work you need to walk away. Everything starts with the purchase price. It is important that you negotiate as hard for a rental property as you would for a rehab. The purchase price directly impacts monthly cash flow. There is much more that goes into calculating cash flow than the monthly principal, interest, taxes and insurance. You need to know all of the utility costs, property management fees, maintenance costs, lawn care, snow removal and much more. These figures can’t simply be your best estimate. You need to have real numbers. This goes for your projected rental price as well. When you run your numbers you should be as conservative with the rents received as possible. Even if you plan on doing work it may not equate to a large bump in the rent. There are dozens of numbers associated with a rental property, even when looking to refinance your rental property. As an investor, you need to know everything about them.
- Rentability. Not every property makes a good rental property. Prior to moving forward you need to do a little research on other rentals in the market. Take a look at what they offer and how it stacks up to your property. Put yourself in renter’s shoes. Does your property have comparable size, square footage and room counts? Does it have certain amenities that would make it appealing? Is it located near major highways or popular commuter destinations? You don’t necessarily need to update the property from head to toe but you do need to put some shine on it. If all things are equal renters will look at the property they feel the most comfortable in. The little things matter more than you may think. All of this should be taken into consideration before you make any offer.
- Risk vs Reward. Being a landlord can be difficult at times. You want to own properties that make your life as easy as possible. There will always be unexpected issues but these should be the exception and not the norm. As you evaluate a property you need to look at what items could be a potential headache down the road. Is driveway parking limited and off street parking minimal? Is the subject property located within a few feet of other properties? Is the property near a major college or university? Does the town have outdated rental policies? If you are going to have to deal with something every week it may not be worth a minimal return. It is also important to factor in a property management fee to your monthly cash flow. You may have time to handle everything with the property today but what if things change a few years from now. You don’t want to be running around for a property that you don’t see much value in. Before you commit to any rental property you need to take a look at the risks in relation to the conservative estimated returns.
Many rental markets are still at or near all-time highs. This is a trend that doesn’t appear to be changing any time soon. For every horror story you may hear about a rental property there are nine other landlords who have enjoyed great success. Before you make a rental property purchase you should keep these four areas in mind.
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