So you want to be a landlord? Here’s what to look for in a rental property. If you’re thinking about buying an investment property, now is a great time. People aren’t buying their first homes, for the most part, until they’re around 30. So what are they doing in their 20s (besides living with Mom and Dad)? You guessed it: renting.
Buying investment property that you rent to tenants can bring reliable cash flow make sure the following things are in place;
1. Look in urban areas: You might long for peace and quiet, envisioning yourself listening to the soothing sounds of nature as you relax at home. But renters want to be where the action is. One big draw of renting is living near shopping, restaurants, and public transportation — amenities that typically make homes expensive to buy. Choose a location that renters will find convenient.
2. Choose a good school district: Many of your potential renters will be young families, and they usually care about the schools their children will attend. “School districts are key,” as many renters are often willing to pay more if a property is in a desirable school district.
3. Check out the job market: When people have jobs, they can afford to set up their own households versus living in basement apartments or with roommates. So demand for rentals is higher in strong job markets. Always buy in a market where there is a strong workforce and housing is needed.
4. Pick more bedrooms: If you had the choice of buying an 1,800-square-foot house with four good-sized bedrooms or the same-sized house but with six small bedrooms, which would you choose for your investment property? If you chose the six-bedroom home, you would be correct.
5. Choose low-maintenance landscaping: You might get a tenant who loves to garden and mow the lawn and will keep your yard pristine, but you can’t count on that. If you leave the responsibility of lawn care to your tenant, it might not get done. The other options, if your rental property has a large lawn, are for you to maintain it yourself or pay a landscaping company to do it. The first is time-consuming, the second, expensive. An investment property with low-maintenance landscaping is the way to go.
6. Set up a dream team: Your dream team consists of all the people who can help you. This includes a real estate agent who is familiar with investment property, general contractors, and a property management company. The next step is to co-ordinate everything so your property is rented hassle free.
7. Make sure you can rent: Imagine buying what you thought was the perfect rental home only to find you can’t rent it. Some zoning laws or homeowners’ associations restrict rentals. Always do the proper due diligence to ensure that the property you’re considering falls into zoning that allows for the legal rental to avoid running into any legal issues.
8. Do the math (simplified): If you’d rather clean your fridge than pull out a calculator, you’ll appreciate these simple methods to run the numbers. And the best part is that they’re a pretty accurate way to determine whether you’ll potentially make money on your investment property.
9. Do the math (using formulas): If you like math and want to plug in some numbers for more accurate ways to determine whether you’ll make money, figure out your cash flow first. You simply subtract your expenses from your income. Sounds simple, but you first need to know what your expenses will be. Your total income will typically be your monthly rent multiplied by 12.
Expenses vary, but here’s a general list to go by:
- Mortgage payment
- Property taxes
- Homeowners’ insurance
- Property management, optional (figure 8% to 12% of monthly rent)
- Homeowners’ association fee
- Vacancy rate (figure 10% of monthly rent)
- Repairs (figure 5% of monthly rent)
- Add up all these monthly expenses (if some are yearly, such as property taxes, divide by 12 to get the monthly amount). Subtract the amount of monthly expenses from your monthly income to determine whether you’ll have a positive cash flow.
Do you have a go-to method of choosing investment property? Let us know in the comments!