If you are considering becoming a landlord then one of the first things you’ll want is some rental property investment advice. After all, if you’ve never purchased an investment property how do you know where to start? In today’s post we’ll offer some advice on the basics of investing in property. Hopefully this information will help you make a good investment decision setting you on the path to prosperity.
There are ways to make money quickly with investment properties. You could buy run-down houses in a decent neighborhood, renovate and refurbish, and then flip them. Lots of people are doing that. But you have to constantly make good purchase decisions, make good renovation decisions, and hope the market doesn’t quickly turn. One bad decision can wipe out years of profit.
But the biggest difference is that flipping houses doesn’t provide a recurring revenue stream like a rental property. To have a recurring revenue stream you need to make sure that your property is cash flow positive. That simply means that after you subtract your mortgage cost and expenses from the rental charge, there are dollars left over. For example, lets assume you rent your property for $1,000 a month. Your mortgage is $500 and your monthly expenses are $200. That’s $700, leaving $300 a month in positive cash flow or recurring revenue. Plus if home prices appreciate, when you sell the property down the road you will have benefited financially from the market appreciation.
In business location is everything. At least to a local business that relies on being visible. For rental properties location is positive or negative depending upon a number of factors. First what is the average income of people in the neighborhood. The higher the average income the higher the likely rents you can charge. Typically you want to set your rents at about 1% of the home value, so a higher income neighborhood tends to have higher priced homes which tend to support higher rental rates.
Another factor is how safe the location is. If its a nice neighborhood but for some reason has a high level of crime, that will drive down your rental prices. How good are the local schools? Better schools equal better prices. Is the home on a busy or quiet road? Is it in a walkable neighborhood or district with access to parks, restaurants and shopping. These all have an effect on rental rates.
Looking at it from a cash flow perspective, what are the property tax rates and any local taxes. These need to be understood and factored into your expected rental price to ensure positive cash flow.
There are many types of properties you can consider. Condominiums, town homes, single family homes, etc. What is the best option for your long-term financial goals? Typically your best option would be to focus on single-family homes. These properties tend to attract renters who are families and couples rather than individuals. And families and couples tend to be more financially stable then individuals which helps with being able to afford higher rents.
Long term single family homes are more likely to appreciate relative to condos or town homes. Just understand that the best type of property for you will also be affected by the amount you have to invest and the local market where you can invest in.
Purchasing a rental property is no different from purchasing a primary residence home. There is a lot of potential for hidden damage or wear and tear that can cost you thousands of dollars. Unexpected maintenance and repair costs drive up your purchase cost and extend the time until you can rent the property. In addition appliances and systems that break or wear out soon after you purchase have to be addressed eating into your recurring revenue.
The first step is to make sure you are working with a qualified home inspector that you trust. This person can help you identify potential issues. During the inspection the inspector will note a number of issues as every home has something that’s not quite perfect. Your goal is to then be knowledgeable enough to decide what is a big issue and what isn’t. Be sure to ask your inspector a lot of questions. Also only bring in an inspector on homes that you are serious about as you can expect to pay $300 to $600 for each inspection.
Finally, in most cases we’re not a fan of purchasing extended home warranties, but when purchasing a property we think its a no brainer. On a recent purchase we had the downstairs AC unit start leaking, the built-in microwave stopped working, and the ice-maker on the refrigerator started leaking. On their own each of these would have been at least $200 or more to fix. In fact the AC company wanted to replace the AC condenser assuming that there was a crack in one of the coils. (an expensive project). The home warranty repairman came out, took off and unclogged the drain tube, and fixed the problem. Total cost for the warranty visit was $75.
Above we briefly touched on the fact that families or couples tend to be a better renter for you then individual. That’s a pretty broad blanket statement. You still need to dive deeper into the pre-screening process for potential renters. You need to understand who they are, why they are moving, what their previous rental history is, their financial means and more. This is a serious process as these are the people (or person) you are going to be turning over your investment to. A tenant that pays their rent on time, is quiet, doesn’t cause damage beyond wear and tear and sticks around for a while is valuable tenant. One that does the opposite is an expense waiting to turn into an investment killer.
Be sure to read our post on “How to Pre-Screen Tenants” to learn more about how to find the best tenants for your property.
If you need a little more help than our rental property investment advice above contact us. GSPM assists property owners and investors in maximizing revenue potential while minimizing the hassles in marketing and managing their properties. We recognize that there are a lot of factors that go into making a property a successful investment and put our experience and knowledge to work for you. Call us at 404-254-4502 or complete our Fast Form to learn more about our services.
