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.
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.
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.
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.
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.
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.
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.
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.