All investment properties are not the same. You can’t buy any property in any location and expect rent checks to start rolling in. Like any other aspect of real estate it takes a number of items to be successful. Without all of these items in order your ideal rental property can end up being a lemon. The best rentals are those in high demand areas that can weather any dips in the market. They will be filled with useful amenities and have solid numbers to support them. As obvious as this sounds many overzealous investors disregard these principals and look to buy the next best thing that hits the market. If you are interested in buy and hold real estate here are five keys to a successful rental property.
- Location. You don’t need to be a full time real estate investor to understand the importance of location. Without question location is the single most important factor in any investment property purchase. You can get a great deal on a property but if tenants don’t find it appealing you will not get the return you anticipate. The location of the property will not only influence demand but also the rent price and the amount of management needed. In evaluating location you should do your homework on other rental properties in the area. Compare your subject property to what is on the market. A common mistake that is made is thinking that the work you do will greatly influence the rent you can charge. Improvements are always nice but tenants are not willing to pay 15-20% higher than fair market value. You may be able to justify a higher rent based on the desirability of the location. A good location has a direct positive impact on everything else with your property.
- Numbers. A good property is one with strong numbers. You can’t get caught up in how much you love the neighborhood or the layout of the property. The numbers should tell you how to proceed. When evaluating cash flow you need to dig deeper than just the mortgage, tax and insurance payments. You need to account for vacancy, maintenance, property management, utilities, license fees, snow removal and lawn care. Overlooking or ignoring just one of these items can greatly reduce a positive monthly cash flow property to an average one. Cash flow isn’t the only reason to buy investment property but it certainly is a major factor. If there are any questions with the numbers you should do your homework until you are comfortable with the answers. Don’t be afraid to ask your real estate agent or to go to town hall to get the information you need.
- Management. It is not enough to find a tenant and hope you receive your rent every month. The most successful rental properties are also the most well managed. Prior to even starting your property search you should have an idea of how you plan on managing the property. There is really no right or wrong way to approach management. For every landlord who is comfortable self-managing there is another who will only use a property manager. The two biggest factors in your decision are time and cash flow. You first need to acknowledge how much time you can spend at the property. If something unexpected comes up can you drop everything and immediately get on it? If the answer is no you are better served using a property manager, regardless of the cost. Not taking care of issues as soon as they pop up will cause your tenants to lose faith in you and eventually begin neglecting your property. They will get out of your house as soon as the lease is up and you may lose a valuable tenant you could have held onto long term.
- Tenants. The strength of your tenants often determines your success. While you can never tell what kinds of tenants you will get there are some items you can use as indicators. If your property is located near a college or university you can realistically expect student tenants. This can increase the amount of rents received but it can also make your management more difficult. If you are looking at a multifamily property you should anticipate dealing with multiple tenants. Increased tenants have some definite advantages but also mean more than one person calling you every time there is an issue. Before you get too far with your purchase you should have a few ideas and strategies lined up for how you plan on finding tenants.
- Remember The Little Things. Whatever you find appealing with a property the odds are your tenants will as well. Seemingly little things like a dishwasher or washer/dryer in the basement can push your property over the top. Look at how you can improve things rather than how they are currently being used by the seller. The seller may have used the garage as storage but with a days’ worth of cleaning you can turn it into a functional parking space. Tenants who have children or don’t want to have to worry about scraping their car off in the winter this can be a big deal. A swimming pool or even a fireplace may feel like a big deal but in most cases a nice deck is more important. A rental property with amenities and feels like home has a better chance of finding good tenants.
A good rental property can set you up financially for years to come. Use these five keys as a guide in your search for the right property.
