Investing in Rental Property – What to Know!
Investing in Rental Property – What to Know!
Pick a great location
Start small for big cash flow %
Run the numbers conservatively…then run them a second time
Don’t over-improve the property
Hire Property Management Co. to choose tenants wisely & handle Leasing
- Pick a great location
For long-term equity growth, a residential rental property in a good location is key.
Look for proximity to major roads, public transportation, big business, and schools.
Research rents in the area you want to pursue, both in as-is condition and with repairs or improvements.
The biggest mistake investors make is overestimating what their property is worth, which results in vacancies and below-market rents. Some property management companies are willing to offer advice on this. They can be that helpful resource for you when you need it, and at a management company like Cardinal Point Property Management LLC, advice is always free!
You also want to get inside the minds of your audience: If you are in a beach town, for example, it’s important to know how beach-goers think, the maximum distance they’re willing to be from the sand and the sunny locations they consider ideal, so you can buy a property that will be in high demand.
- Start small for big cash flow %
Start with an affordable initial investment like a single unit or a duplex versus a whole apartment building. That way if things go south and you are unable to afford to pay for mortgage or maintenance, you are not running as much risk of going bankrupt.
Because you’re just getting started, avoid properties needing significant repairs, since these could cause you to overextend yourself. You want to look at the property that will generate a positive cash flow where the rents are greater than all the expenses that come with owning and renting a property. That could be up to 15 percent in a typical residential market.
Consider using Cardinal Point Property Management LLC as your property manager and ask them for referrals for attorneys, handymen, landscapers, contractors and other real estate professionals who can help you, and will become valuable contacts over time.
- Run the numbers conservatively…then run them a second time
It’s important to treat each rental property like its own business to serve as a good investment.
The most important consideration for prospective landlords is to accurately estimate rental income and the costs associated with leasing. Until a landlord has a precise grip on these issues, they risk owning a property that is a net loss every month.
Gambling on appreciation alone is not a good idea.
Investment real estate is often valued by its capitalization rate, which is computed by taking the net operating income divided by the going cap rate in the neighborhood to come to an appropriate price.
Your monthly expenses will include the mortgage or debt service, taxes, insurance, lawn and pool maintenance, property management and insurance. At least 20 percent down payment will likely be required if financing the purchase.
Vacancy, turnover and eviction are realities of leasing any property, so wise landlords must assume at least a month’s rent loss annually.
- Don’t over-improve the property
To keep your cash flow at optimal levels, don’t spend too much on upgrades for a rental property that will likely need maintenance and repairs during turnovers anyway.
Because maintenance is also a given when owning rental property, consider buying a home warranty to better spread out the cost of repairs.
Consider what type of maintenance is required based on the type of property you purchase. The landlord may be responsible for things like lawn mowing and snow removal, but if you buy a condo or townhouse, that maintenance is usually included in the condo fee, resulting in a more hands-off process.
- Hire Property Management Co. to choose tenants wisely & handle Leasing
Dealing with tenants can be demanding, but it doesn’t have to be. A final critical evaluation is if the buyer intends to manage the rental herself or himself. Are you prepared to thoroughly screen tenant applicants, and assert yourself in difficult tenant situations, handle those middle of night emergency calls, and be knowledgeable about potential legal issues?
A landlord needs thick skin. If you’re likely to waver with applicants who are not qualified, or with late rent payments and other lease violations, you may need to hire a management company like Cardinal Point Property Management LLC to protect your investment.
Tenant income should be at least three times the rent when utilities are not included, and verified by calling their employer. When you know the red flags, and what else to look for up front & hiding in a tenant’s application, it will keep vacancies and eviction losses to a bare minimum.
Cardinal Point Property Management is available to help you in all aspects of Property Management & Leasing within 25 miles of Portsmouth, NH (including ME & MA)
As always, please feel free to contact us regarding any property management questions. Advice is always FREE!