Finding a “bargain” property to purchase for rental purposes takes some analytical skills, market knowledge, and a real estate agent who is in sync with your investment goals.
Some investors would consider the ideal rental property to be a three- bedroom, two-bath house in good repair, or needing minor touch-ups at most, and would be willing to pay at or near market value price if neighborhood rental values would justify the investment.
This investor would be holding the property long-term, and would have a desirable property, available for immediate occupancy, and would attract renters willing to pay top dollar to live there.
Other investors would prefer to find a property that is structurally sound, but in need of extensive cosmetic rehabilitation. If this property could be purchased at a considerably below market value price, and if the cost of repair and possible rental income would justify the purchase price, then that would be this investor’s idea of a “bargain.”
A knowledgeable real estate agent should point out to the new investor that disassociating ones self from a prospective property to rent is vitally important, meaning that the investor should not evaluate an investment property as a property he or she might want or not want to live in. Investment properties should be looked at with profit potential in mind.
Holding a rental property long-term, enables the investor to ride out market swings and generate continued cash-flow. However, consideration must also be given to the fact that the longer a property is held the more extensive the costs of future repairs are going to be, such as roof replacement, appliance replacements, etc.
Furthermore, if the investor is planning to purchase multiple rental properties over time, consideration should be given to hiring a property manager to oversee rent collections, maintenance, emergencies, etc.
Hiring a property manager is often more cost-effective than handling everything one’s self. Additionally, the property manager can be the investor’s knowledgeable guide in calculating the rent levels that would simultaneously attract renters and optimize revenues.
The new investor will have many important decisions to make before committing to a particular property:
- Is this property suitable for my purposes?
- How much should I pay for this property?
- How much of an investment in repairs and replacements would be necessary?
- Would repair and/or replacement costs override any equity gained at purchase?
- Is the neighborhood stable, on the upswing, or deteriorating?
- Would the property location be attractive to a wide range of renters?
Of course, we’re just scratching the surface here, within the limited scope of this article but the bottom line is that the key to real estate investing success is to understand the real estate market and which way it is headed. No easy task, unless you have the experience and the back up of a knowledgeable investment team to guide you.
Jolenta Averill says:
Excellent article, Tony. I’ve been toying with the idea of picking up an investment property or two for quite some time and now I know I’m on the right track with the kinds of questions I’ve been asking myself. That is, I can tell I’m on the right track after reading your terrific article. I’ve bought lots of investment properties on behalf of my clients but somehow when it comes to forking out my own cash, it’s different. (Why is that, by the way?)
September 21, 2010 — 6:37 pm
Michael Cook says:
Tony,
As a real estate investor, I do understand what you mean when you say:
“disassociating ones self from a prospective property to rent is vitally important, meaning that the investor should not evaluate an investment property as a property he or she might want or not want to live in. Investment properties should be looked at with profit potential in mind.”
However, it is important that you be willing to get into the neighborhood and the property and get your hands dirty. While you might not want to live in a two bedroom on the wrong side of the tracks, you do need to be willing to take an active interest in the neighborhood and the neighbors to keep your investment producing regular cash flow. Understanding your prospective tenant and their needs will put you ahead of the game.
September 28, 2010 — 9:39 am
Greg Swann says:
> While you might not want to live in a two bedroom on the wrong side of the tracks, you do need to be willing to take an active interest in the neighborhood and the neighbors to keep your investment producing regular cash flow. Understanding your prospective tenant and their needs will put you ahead of the game.
I agree with all of this, and I’ll go you one better. I guide my investors into newer, suburban neighborhoods. The homeowners already living there don’t like to see investors and their tenants moving in, so I send my landlords out door-to-door: “Hello, Mrs. Nelson. I wanted to let you know that I just bought the home across the street with the intention of turning it into a rental property. I know this is a matter of concern for owner-occupants, so I just wanted to stop by to let you know that your concerns are my concerns: I want to make sure I’m doing everything I can to sustain everyone’s property values. So here’s how we can work together to achieve that goal: I want for you to be my spy. If you see my tenants doing something you think will hurt your property’s future value, I want you let me know right away. I’ll jump on the problem, and I’ll bring you a little something just to express my appreciation.”
My take: Passive landlords are fools.
September 28, 2010 — 11:07 am