Before signing that next rental property contract, make sure you’ve checked all the appropriate boxes. That said, the rush to scale and build out income property portfolios before interest rates go up is officially on. If that wasn’t enough, recent turmoil in the stock market has added a significant amount of competition to an already competitive market. I can assure you things will only escalate in 2016. However, even though time is of the essence, investors can’t afford to neglect sound investment principles. Hastiness can sink investors if they fail to cover the basics. With that in mind, here are seven boxes you need to check before you buy your next rental property:
1. Local Credit Quality: It is shocking how many intelligent and often already successful individuals completely sabotage their financial futures on their very first rental property. Far too many investors, for that matter, fail to understand the market they are in, or even the tenants they will deal with.
Times have changed, and they will keep changing. In fact, change is the only constant in the real estate industry. The quality of credit in a local neighborhood is no exception. While the situation is certainly improving, millions of U.S. renters are still suffering from bruised credit in the wake of the crises. If new landlords come in with high credit standards based upon the market of 11 years ago, they may find their rental units sitting vacant for months. There may be markets where 700 credit score tenants are lining up. There are others in which landlords may not find a renter with a score over 660 in a year. This may or may not relate to tenant performance. One thing for sure, vacancies are costly. Do you know what the average local tenant profile looks like?
2. Vacancy Rates: Are you familiar with the area’s vacancy and occupancy rates? Investors must know how much competition or excess there is in order to budget accurately. This is important for gauging how long it should take to secure new tenants. With this data as a barometer, landlords can also better assess their need to relax renter requirements, or when they can tighten them. Truth be told, the better you know how well an area performs, the better off you will be. Ask your neighbors how well the area is doing, and adjust your budget accordingly.
3. Longevity of Tenants: How long do tenants in this neighborhood normally stay? Is it a week, one month, six months, one year, or seven years? This is critical to know for anyone looking to maintain a sustainable strategy. It will help streamline the process of screening tenants, and it will help landlords position their properties. Either way, this is absolutely important if you intend to maximize your income.
4. Seasonal Influences: You may already be well aware of the difference in prices between annual and vacation rentals. However, seasons can also impact the amount of demand and activity in a respective rental market. Horrific weather can keep people indoors. Summer can get them out. Migration trends can also cause very specific spikes in action. Google Trends can reveal a lot about this in just a few minutes. If you don’t know, you could make significant mistakes.
5. Rental Rates: Never rely on the claims of those with an interest in seeing the deal completed. At best, they can be optimistically biased. Always double check assumptions with additional data. Forget asking rents online; what are comparable properties really renting for?
6. Financing Ease or Issues: Are your hopes for financing feasible? Who have you spoken to that can either confirm or deny your application? What challenges might there be for future buyers? Are lenders excited about lending in this destination? Or have they blacklisted it for mortgage fraud? Could there be maximum loan amount restrictions, HOA restrictions, or seasoning limitations? Financing is the lifeblood of any real estate deal, and rental properties are no exception. Before you buy your next rental property, make sure all of your finances are in order. If not, it may be a while till you can even consider a buy and hold property.
7. Jobs & Wages: While 2016 is expected to be a great year for U.S. real estate, there are few that seem to doubt there will be some substantial waves in the economy. These could impact jobs and incomes in some parts of the country, for better and worse. How might an ongoing lull in oil and stock market performance affect today’s market? Do your projections account for this?
This is a great time to consider rental property portfolios. However, even though interest rates and asset prices are appealing, it is critical that landlords have all of these boxes checked before moving forward.