Buying rental properties is a good way to increase your assets. However, choosing the right rental property will be challenging. Here are a few things to check for prior to buying rental property.
1. Location - Most people don't want to live in the boon docks. The location of your rental property will determine how easy it will be to rent. If you have a lot of vehicle traffic, you may receive a greater response from a sign at the location than you will from a newspaper add.
Tenants want to live in nice neighborhoods close to all the amenities. They want to be close to the schools, stores, recreational locations, hospitals, and work.
I haven't met anyone who wants to live in an undesirable neighborhood or drive 15 minutes for a gallon of milk.
2. Numbers - When buying rental property you want to check the numbers. Make sure you have all the expenses associated with that property and make sure it still has a positive cash flow.
Take into consideration the maintenance issues, any utilities not covered by tenant and amortize the cost of the big projects like furnace replacement, new roofing, siding or landscaping.
These projects only happen once every 15-20 years but you may be coming in to this in the 10th year of that cycle. Remember to calculate your expenses high and your income low. This can save you some surprises down the road.
Expect the unit to be empty at least one month per year due to turn over. You will have to repaint and clean the carpets the first 2 weeks, then advertise and show the next 2 weeks. You should only count on 11 months of rent per year.
3. Lower Maintenance Buildings - You want to avoid homes that will require expensive routine maintenance. Some examples would be homes that have cedar-shake shingles or siding, wood sided buildings, wood frame windows, brick driveways, cedar decks, etc.
Try to look down the road and determine the future maintenance needs. Remember the lower the maintenance the less headaches and larger profits.
4. Higher Home Prices - Check in towns with higher home prices, because this increases the demand for rental property. Look for the ugly house on the block that has a lower price, enabling you to purchase within the margins.
After some interior and exterior paint, a little light landscaping and new curtains, viola', a house that will get premium rent because of the class of neighborhood.
If people can not afford to buy a home in this class they will have to rent. This will create a demand for rental property.
5. Below Market Rent prices - When buying rental property, look for rental property which has rent prices that are below current market rents. This will allow you to raise the rent and increase the value of the property. As per above, this may just need a little fluff to enable raising the rental price.
Rental property market value is determined by the amount of income received by the rental property. However keep in mind, if the rental property has renters when you purchase it, they may not like it when you raise the rent. Also check to see what type of lease is in place. The lease goes with the sale.
If the current renter is paying a substandard price and has 1 1/2 years left on the lease it could turn out to be a losing proposition.
There is only one way to cut a lease short as a new owner. You must remodel the place. Check with the local housing commission to see what the minimum cost requirements of remodeling are for immediate eviction of current lease holders. It is usually as little as $10,000.00 in remodeling cost to get a remodeling eviction. By the way, you didn't hear this from me!
6. Good Rental History - Whenever buying rental properties, you must check the rental history. Check to see on average how long tenants are staying and do they pay their rent on time. Some areas of town are naturally quick turnover times. Near airports, loud bars or nightclubs, near military bases, etc.
7. Complies with Zoning and Fire Codes - Make sure you check to see if there are inspections required by local officials for rental properties and does this property pass those inspections. You never know the real reason the current owner is selling the property.
It may need extensive repairs to pass the inspections. A quick red flag would be if the electricity has been turned off for over 90 days. They will usually require an inspection before restoring power, especially if it is a known rental.
8. Less Than Twenty Years Old - This is self explanatory, if you restrict your selection to buildings that are less than twenty years old, you will limit the chances that the building will have any building code or maintenance problems.
The building could be near the maintenance cycle for roof, paint and possibly furnace but the structure will be sound and not needing upgraded windows, siding or cement repair.
9. Out of State Owners or Managers - When buying rental property, look for properties that are owned by out of state owners. It is hard to manage rental property from out of state and when these come up for sale, the owners are usually more concerned with selling quickly than getting top dollar.
In order to rent a place quickly you must live near by so you can show it at the caller's request. Often times they will ask to see it in the next 20 minutes or so. Cater to their requests and show it quick. Most renters need a place within the next week or so and will not wait to see your place until next week because you are busy.
Most times they will make a decision before tomarrow when it would be more convenient for you to show it. This has happen to us to many times.
Never give out the address for drive bys. Prospective renters will ask for the address to do a drive by and just look at the place. Don't waste your time with these folks. Insist on showing it in the next 30 minutes or you will not give out the address as a courtesy to the neighbors.
10. Neighborhood is stable or improving - obviously avoid neighborhoods that are declining, look at the writing on the walls and stay out. Although these may look good due to the low purchase price, they are very difficult to collect the rents.
By finding neighborhoods that are stable or improving, it will be easier to rent the property and you will be able to increase the rent. The general consensus is, the better the neighborhood the higher the purchase price and the higher the rent prices, therefore the margin for profit is greater. The poorer the neighborhood the lower the purchase price and lower the rent prices reducing the profit margins.
Do not be afraid to buy nicer places for rental properties. The people that can afford $1000.00 a month are more likely to be able to come up with the rent on time versus someone that can only afford $350.00 a month. One little upset in the latter case and you will not get your rent on time, if at all. There is far greater stability in renting high end places versus being a slumlord!
Copyright (c) 2007 Brian Ankner All Rights Reserved
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