The right rental property can not only change your business, but also change your life. Imagine collecting positive cash flow for five, ten and even twenty years down the road? By purchasing the right property in the right market, you can experience the same benefits.
There are many real estate investors who focus solely on rental properties. They may not have the quick returns that rehabs offer, but they can put you in a great position for future wealth building. To be a successful rental property owner, there are a few basic things you need to know. Alone, these things will not guarantee success, but they will go a long way in building a solid long-term portfolio. Here are five tricks to improve your rental property’s performance:
1. Buy in the right market: The success of a rental property is based on the demand created by tenants. If you buy in areas that are undesirable, demand will be greatly reduced. This will eventually lead to a reduction in your rent price, or being forced to take on a tenant you know may have issues. On the flip side, when you buy in desirable areas, you can be confident that your home will keep its appeal for years to come. Better areas also have a way of attracting better tenants. This will ultimately reduce your vacancy factor, and keep your property running efficiently for as long as possible. The right market may cost you a little more on the acquisition side, but I assure you that it is worth it.
2. Get the best deal: When it comes to buy and hold assets, there is a tendency to be less careful with the property. Regardless of what kind of property you are buying, you need to get the best possible deal. Oftentimes, this means doing your own marketing to find deals that are off market. With off market listings, you can acquire a property free of any real estate agent fees and other costs. You are also in a position to negotiate directly with the homeowner, which usually has motivation to sell. Here is where you need to stand your ground. This doesn’t make you inflexible or difficult to work with; it just means that you understand the importance of getting the best possible deal. Everything you do for the next several years will be based on the purchase price and the rest of your monthly expenses. A few thousand dollars may not seem like a big deal, but over time it can have a huge impact. Even though you aren’t looking to make a return in the next ninety days, you still need to get the best possible deal.
3. Find the right financing: Although the number of loan programs and products have declined in recent years, there are still many options available. Many investors gravitate towards the most obvious option: 30-year fixed-mortgages. This certainly makes sense for many owners, but not for everyone. The first thing you need to consider is your down payment amount. If this is your first property, you may be able to take an FHA loan with only 3.5 percent down. This is great when you get in, but doing this will leave you with PMI (private mortgage insurance) payment for the life of the loan. This eats into your monthly cash flow, and will impact what you charge for rent. The next option is to put down the required 20-30 percent of the purchase price. This will help you avoid the PMI, but will often be at a higher interest rate. The last option is to pay for the property with cash. Doing this leaves you with only property tax and homeowners insurance payments. The void in your assets will be recovered in time, but not for several months. The right financing changes from owner to owner. Before you make an offer, run all the numbers and know the pros and cons with each option.
4. Promote your rental: The ideal rental scenario will witness the same tenants in the property for years on end. This may not always be the case, however. Depending on your market, you may have to find new tenants every nine months or so. This means you need to give yourself enough time to keep your property filled. There are many free websites you can use, but these may not be enough. Use everything you can to get the word out. Social media, friends, family and bandit signs should all be used. If you wait until you are too close, you will start to lower your tenant standards. One bad tenant can completely throw your property for a loop. Don’t wait to find your next tenant.
5. Find good tenants: Everything in a rental property revolves around the tenants. Nothing really matters if they aren’t providing cash flow. Good tenants do not just fall into your lap. You need to put the time in to properly review the application, and vet who you may be renting to. Call the previous landlord and found out their employment status. Talk to them about expectations, security deposit options and what they want out of your property. With the right tenants you can focus on maintaining the property, and not have to worry about anything else. Bad tenants, on the other hand, will cause you more headaches than they are worth.
Ten years down the road comes quicker than you may think. A solid rental property or two can put you in a great position in the future.