Buying rental properties can be a great way to build your wealth. However, as in most real estate investment, it is sometimes difficult to know if you’ve found a good deal – especially the first time. Here are some things to look for to be sure that rental is a great investment:
- Location. If traffic is heavier, rentals are easier to rent. A sign will often pull more response than an ad in the paper. If it is a nice locale, it will usually rent faster. This is also true of places close to amenities.
- Numbers. Run the numbers. Get every last expense figured into your calculations, and be sure that you will have positive cash flow from the start. Aim for at least a 10-20% monthly return after all expenses are paid when buying rental properties.
- High home prices. Look in towns with high home prices, as this creates rental demand. What do people do when they can’t afford to buy? They look for rental property to rent.
- Low maintenance buildings. Avoid cedar-shake roofs, and wood-sided buildings. Look beyond current expenses to how much maintenance the building will need in the future. Low maintenance means less headaches and more profits each month on your rental properties.
- Good rental history. Ask to see the rental history. Note how long residents are staying on average, and how well they pay on time. Buying rental properties in Mesa, AZ and surrounding cities that are approved Section 8 Housing projects are a great way to secure a solid rental history, because the city sometimes pays up to half of the monthly rent! That is guaranteed money every month.
- Below market rents. Buying rental properties with below-market rents means you get to raise rents. Raising rents means you immediately raise the value, because rental property values are based on income.
- Complies with zoning and fire codes. Have it inspected, and ask local officials if there are any problems.
- Less than 20 years old. This is somewhat arbitrary, but if you limit your search to newer buildings, you will be less likely to have building code and maintenance problems. Again, goes back to your risk tolerance and perhaps your cash reserves because older buildings will cost more to maintain and improve.
- Owner/manager that is out of state. These properties are often the best deals, because it is tough to manage a property from far away. An out of state seller is often more concerned with a quick sale than a high price.
- Neighborhood is stable or improving. Stable is okay, but if you can buy rental property in a neighborhood that is improving, you’ll rent the units more easily, and therefore get automatic appreciation in value with time.
Now go make your first deal happen! Prepare your finances, start your research, call your REALTOR®, make and close the deal, get it ready to rent and start collecting checks! I strongly advise my clients to find a property close to their residence (within 5-10 miles or less); especially if it is your first rental. I also believe that if you are in a position to do it, be your own landlord (property manager) for the first several years before you go out and hire a property manager. Then you will know what questions to ask when trying to find the best manager and you will be able to explain how you expect the property to be managed! Check out my blog about the tax advantages of owning rental real estate; as part 2 of that series is going to be posted in the near future! Please SUBSCRIBE to my blog! Thanks for visiting today.