Building a real estate portfolio of rental properties can provide you with limitless wealth if you focus on the right assets. For as good as rentals can be, they can be equally as bad if you don’t know what to look for. Many investors will look at the property itself instead of how the property is as a rental. All it takes is for you to miscalculate the repairs or to overestimate your projections to get involved in a bad property. Before you make an offer on any rental property, there are a few things that you should look at that will give you a real indication as to just what you are buying.
A successful rental property comes down to income and expenses. It is crucial that you factor in all of the expenses that you will endure. Major expenses such as loan repayment, taxes, insurance and some utilities are fairly obvious, but there are many others that can easily be overlooked. Everything from a vacancy factor to snow removal must be accounted. There are many good rental property checklists you can find online, or you can list every expense you can think of on a spreadsheet. The expenses are one major piece in determining the cash flow of the property. All of them need to be accounted for if you want a true estimate.
It is not enough to simply list the expenses. You need to make sure your numbers are accurate. In reality, things rarely go smoothly when it comes to a rental property. You will need to repair or replace items that you may not have originally thought. It is important that you are conservative with your estimates and leave some room for error. Many investors think they can sprinkle their magic dust on the property and it will automatically turn profitable as soon as they take ownership. The more conservative you are with your expenses, the better chance you will see positive cash flow every month.
It is important to know what numbers you can change and which may be a stretch. If the property is renting for $800/mo, there is not much work you can do to get that figure to $1200. You may think that your new appliances and fresh coat of paint will attract renters, but it may not have the impact that you think. Renters are interested in location, price and amenities. They typically aren’t interested in paying over market rent for extras. Look at other rentals on the market in your area. If there are similar properties, they will almost always lean towards the one that is less expensive. New appliances will have an impact on the value when you sell, but it may not give you the sharp increase in monthly cash flow.
What is the biggest attraction to potential tenants? This sounds simple enough, but when evaluating a property you need to think about it from a renter’s perspective. If your property is located near a college or university, you can assume that a bulk of your tenants will be college students. This is great for demand and in obtaining a higher rent amount, but you will also have to deal with issues that you wouldn’t if you rented to a family. Location and price are critical, but look at what makes your rental unique to the market.
One of the biggest mistakes that new landlords make is not budgeting for and having enough cash reserves. Unless the property is completely remodeled, there are going to be items that will need to be updated at some point. Even if your property doesn’t need work, you never know when your tenant will stop paying and you will need to cover the mortgage. When evaluating the property, think about how much reserves you will need. If you do not go into the purchase with these reserves, you may need to find a different property or wait until you build your reserves up. Without cash to do the work you want, things will quickly unravel – even with the best properties. There is nothing saying that you have to use the cash reserves you set aside each year, but it is better to have them and not use than to scramble looking for it when you need to. Between unforeseen weather issues and everything else that could go wrong with a rental property, you need to have cash reserves if you want a successful property.
Owning a rental property is like running an individual business. Don’t fall in love with the property, but fall in love with the rental potential and the numbers associated with it. Although rental properties can be an excellent source for passive income opportunities, a good property may not always translate into a good rental property. Look at all the numbers and make sure they are as accurate as possible. It is easy to bend these if you really want the property, but all you are doing is setting yourself up for trouble. If you have a system in place, it will make your job that much easier. Evaluating a potential rental property takes time and due diligence, but if you can find the right properties you will quickly see the reward.