From the time you decide to invest in real estate to actually buying your first rental property, there is a lot of work that needs to be done. For a first-time investor, the task may be scary. Being a property owner is a tough business and the field is filled with things that can ruin your R.O.I.
Beginning Your Search
Although you may want to complete the purchase of the rental property on your own, having a trusted Realtor by your side can ease the stress. Your Realtor will be able to assist you in finding the property that best suits you. One of the most important things is to take an unbiased approach to all the properties and neighborhoods you are considering.
Your investment range will be limited by whether you intend on being an active property manager or hiring someone else to manage. If you are planning on actively managing, you shouldn’t get a property that isn’t far away from where you currently live. If you are going to get property management company to take over, your proximity to the property will be less of an issue.
Here are 10 things you should consider when shopping for the right investment property:
- Neighborhood: The quality of the neighborhood you choose to buy in will influence both the type of tenant you attract and how often you experience vacancy. For example, if you buy in a college orientated neighborhood, the chances that your pool of tenants will be mainly made up of students are high. You may also face vacancies on a regular basis during summer when students return back home.
- Property Taxes: Property taxes are not a standard amount across the board, as an investor planning to make a profit from rent; you will want to be aware of how much you are losing to the government. High property taxes may not always be a bad thing if the location is a great place for long-term tenant, but the two don’t always go hand in hand.
- Schools: If you acquire tenants that are interested in having children, they will need a place to send them. When you have found a good property near a school, make sure to check the quality of the school as this can affect the value of your investment. If the school has a poor community reputation, prices will reflect the property value pretty bad. Although you will be mostly focused on monthly cash flow, the overall value of the property comes into play when the time comes to sell.
- Crime: No one will feel safe living next door to a hot spot for criminal behavior. Go to the police or public library for estimated crime statistics for various neighborhoods, rather than asking the homeowner hoping to sell the house to you.
- Job Market: Locations with flouring opportunities for employment tend to attract more people meaning more tenants. To find out your particular area rate, go to the U.S Bureau of Labor Statistics or your local library. Pay attention the news; if you notice an announcement for a new major company to the area, you can rest assure there will be workers flocking. However, this may cause house prices to react (negative or positive) depending on what type of corporation is moving in. The point here is that if you would like to have the new company in your neighborhood, your renters probably will too.
- Amenities: Check the neighborhood for current projects like malls, gyms, parks, movie theaters, public transport hubs and other perks that attract renters. Larger cities and sometimes particular areas of a city have tons of promotional literature that can give you an idea of where the best blend of public amenities and private property can be found.
- Building Permits and Future Development: The municipal planning department will have the information you need on the new developments coming or being zoned in the area. If there are many new condos, parks or malls going up in the area, it is more than likely a good area for growth. However, watch out for new developments that could hinder the price of surrounding properties. For example, the loss of an activity-friendly green space. The additional new housing could also provide competition for your renters, so be aware.
- Number of Listings and Vacancies: If there are an unusually high number of listings for a specific area, this can signal a seasonal change or a neighborhood that has gone bad. Make sure you figure out which one it is before buying. You should also determine whether you can cover for seasonal vacancies. Similar to listings, vacancy rates will give you an idea of how successful you will be at attracting renters. High vacancy rates force landlords to lower rent in order to attract tenants. Low vacancy rates allow landlords to raise their rates.
- Rent: The rental income will be the main objective of your rental property, so you will need to know what the average rental rate runs in the area. If charging the average rent is not going to cover your mortgage payment, taxes and other maintenance expenses, then you have to continue to look. Be sure to research the area well enough to know what the market will look like in 5-7 years. If you can afford the area now, but major improvements and an increase in property taxes are in store, what could be affordable now may mean a bankruptcy later.
- Natural Disasters: Insurance is another thing you will have to subtract from your return, so it is good to be up on how much insurance you will need to carry. If an area is prone to hurricanes or earthquakes, paying for extra insurance will be a necessary evil.
Try to get friendly with the renters as well as homeowners in the neighborhood. Renters will be honest with the negative aspects of the area because they have no investment in it.
If you are set on a particular neighborhood, visit it at different times on different days to see your future neighbors and neighborhood in its natural habitat.
Overall, the best investment property for a beginner is a residential, single-family home or condominium. Condos are low maintenance because the condo association is there to help with any exterior repairs, leaving you to only worry about the interior. However, because condos are not considered independent living units, they tend to have lower rents and appreciate slower than single-family homes.
Single-family homes are likely to attract long-term renters in the form of families and couples. This is because two adult tenants are better than one person because they are more financially stable. This owes to the fact that two can live as cheaply as one while enjoying dual income. As a landlord, you will want to find properties that will attract this type of demographic.
When you are ready to begin your search, be sure to have a trusted Realtor and Loan Officer to assist you in investing in your first rental property.