Investment Properties 101
In this day and age, pop culture status is measured by meme-ability. Using that yardstick, real estate investors have officially arrived. You have probably seen the hilarious renditions of obscure, low paying job descriptions followed by out sized budgets. There are several ways to invest in real estate, the most visible one is “flipping”. You can also buy an ownership interest in a real estate fund, trust or partnership. This week’s #ProTipTuesday is all about another way of investing, buying a rental property. We will give you some important things to consider if you are considering adding the title landlord to your business card.
- Know the Numbers
Before buying an investment property, you should know the cost of all the following: mortgage payments, initial repairs, on-going maintenance, property insurance, property taxes (no homestead exemption), management fees (if not managing it yourself). Lender requirements for investment properties are often stricter than those for primary residences. Determine the amount of reserves you will need to have on hand for major repairs. How long can you afford the house to remain vacant? How much rent can you expect the house fetch on the rental market?
- Know the neighborhood
Different neighborhoods attract different prospective tenants and different rates of vacancy. The closer to a college or university the property is, the more likely their students will be your market. While this means a deep and lasting pool of prospects, it also could mean higher turnover and stretches of vacancy during the summer break. A home in a traditionally family centric area will likely attract more families, which could mean longer term tenants who may also be more demanding. Condominiums have an added benefit; the association takes care of the exterior maintenance leaving you only the interior to worry about. If there is an HOA, know that they allow rentals and if they reserve the right to approve or disapprove tenants. High crime areas are an obstacle, a savvy renter will check crime maps and avoid areas where they would feel unsafe.
- Know your competition
How many rental homes are currently listed? A high number of listings in an area, which in turn means vacancies, may indicate either a seasonal cycle or an undesirable market. Know how much homes are renting for in the area, this indicates your likely price. Keep in mind, homes that have been on the market for a while are probably over-priced, otherwise they would have been rented. Are rents increasing or decreasing year over year? Trends are often easier to see due to rental property turn over times. Is there any planned future development? Business growth in the area means more jobs and thus more employees who will need housing. Planned amenities or retail spaces can be a big draw to the area. On the other hand, large apartment complexes mean more competition and could cause a loss of green space.
- Know your limits
Are you planning on actively managing the home or using a management company? If you are going to do it all yourself, you will want the property to be relatively close. It is important to check on your investment from time to time and as the property manager you are on-call for emergencies 24/7. You should also be comfortable with fixing minor items or have a great handy man on speed dial. Location is less important if you hire a management company, but that can cost between 10%-12% of the monthly rent.
This is not exactly an exhaustive analysis process, these are just the basics. Owning rental properties can be a great way to create passive income aka “mailbox money”, but it needs to be done with a lot of thought and consideration. While the hip thing to do would be to buy a dump fix it up and sell it for a profit, keeping that property and turning it into a monthly income stream is a long-term strategy. Income properties when done right, are proverbial tortoises who best the hares. If you need help finding a property, or a tenant we can help!
