According to Rental Protection Agency, there are more than 22 million landlords in the U.S. The majority of landlords own rental property as an investment, whether they purchased the property on their own or inherited it. Some are considering making their first leap into the interesting, crazy, rewarding, and sometimes frustrating world of being a rental property owner. Buying your first rental property is a huge investment undertaking. As such, you need to arm yourself with the right information to ensure it’s a success. If you’re thinking of buying your first rental property, here are 7 pro tips to ensure it isn’t a bust.
1. Make sure it’s for you.
Are you the hands-on type? Do you know how to unclog a toilet? How are you at repairing drywall? Do you know your way around a toolbox? Sure, you can always hire professional help, but that would only translate to fewer profits.
When starting out, you probably will not have tons of spare cash. Thus, without some handyman skills , it’s likely the investment will become unprofitable.
2. Find the right location.
It’s the real estate agents’ mantra: location, location, location. In real estate, location is everything. The location of a rental property can affect its performance directly. Plus, it’ll define the tenant type you’ll attract and dictate your marketing strategy.
This means that you should carefully research where the demand from tenants is, what type of tenants are likely to want to live in the property and what rents are being charged in that area.
Roughly speaking, the right location is one with low crime rates, a decent school district, low property taxes, a growing job market and many amenities like movie theaters, restaurants, malls, and parks.
3. Determine your return.
The main – if not the sole – reason for real estate investing is making money. And in real estate, you’ll only make money if the investment has a good ROI.
Now there are four main ways to calculate a real estate investment profitability. They include return on investment (ROI), the one percent rule, cash on cash return, and the cap rate.
Lets use the capitalization rate as an example. To calculate the return on an investment property using capitalization rate, you’ll need the net operating income (NOI) and the property’s current market value.
A property making $300,000 over a year and costing $200,000 in operational expenses would have an NOI of $100,000. Now to get the cap rate, we’ll need to divide the NOI with the property’s current market value.
For a property with a market value of $800,000, that would be 12.5/100($100,000/$800,000) = 12.5%, or 0.125.
Most experts agree that a cap rate of 7% or greater is ideal. So, the property in our example above would provide you with a good investment return.
4. Don’t buy a fixer-upper.
Looking for a house that you can get at a bargain and flip it into a rental property can seem tempting. But since you are just starting out in the rental property business, that’s probably a bad idea.
While some fixer uppers require small, cosmetic improvements, the majority of them are almost guaranteed to unleash a Pandora box of costly repairs.
The only exception is if you are skilled at home improvements or at least know of a contractor who does. Otherwise, look for a move-in ready home.
5. Calculate your margins.
Wall Street firms that buy distressed properties aim for returns in the region of five to seven percent. Individuals should aim for ten percent.
Typically, maintenance costs average one percent of the value of the property annually. Additional costs include property taxes, HOA fees and monthly expenses like landscaping and pest control.
6. Consider hiring a property manager.
The work of a landlord isn’t easy. Besides understanding landlord-tenant laws, you have to know how to find quality tenants and ensure the property is habitable and that all fixtures and fittings and furnishings are in safe working order and fit for use.
As a beginner in the rental property business, it’s likely you aren’t familiar with these time-consuming tasks. In such a case, you may need to hire a property manager to handle most, if not all, tasks for you.
Now, not all property managers are created equal. Thus, you want to have a set of questions to ask them during the interview.
7. Shun areas with high vacancy rates.
For an investment property to be successful, it needs to be rented out continuously. Even if the rent only manages to cover property taxes, mortgage payments, and related expenses, it’s better than having to foot that bill out of your own pocket.
If you notice that homes in the area you are interested in investing in are vacant, walk away. Chances are yours will be as well.
These are the 7 pro tips for buying your first rental property. Armed with these, you can be sure that your investment will be a money-making machine and not a money pit.
Thank you “Jason Lundgren” with Young Management for contributing this insightful article on Rental Property. A sector of Real Estate that can provide plenty of financial freedom if Navigated correctly.
