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Buying rental properties can be a great way to build your wealth. However, as in most real estate investment, it is sometimes difficult to know if you’ve found a good deal – especially the first time. Here are some things to look for to be sure that rental is a great investment.
1. Location
If traffic is heavier, rentals are easier to rent. A sign will often pull more response than an ad in the paper. If it’s in a residential area with single family homes that can be good. This is also true of places close to shopping, services and amenities. Is it near a Starbucks, Whole Foods and more upscale restaurants? If it is a nice locale, it will usually rent faster.
2. Numbers
Make sure you get real numbers (P&Ls, trailing 12, rent rolls). Run the numbers. Can you cut expenses? Can you reduce rents and still generate cash flow if there is a economic downturn? Get every last expense figured into your calculations, and be sure that you will have positive cash flow from the start.
3. High Home Prices
Look in towns with high home prices, as this creates rental demand. What do people do when they can’t afford to buy? They rent.
4. Low Maintenance Buildings
Avoid cedar-shake roofs, flat roofs, and wood-sided buildings. How old is the roof? Are key mechanicals up-to-date? Look beyond current expenses to how much maintenance the building will need in the short and long term. Low maintenance means less headaches and more profits.
5. Good Rental History
Ask to see the rental history (rent roll), all current leases and tenant applications. Who rents? Do they receive government subsidies? How many evictions? Note how long residents are staying on average, and how well they pay on time.
6. Below Market Rents
Buying rental properties with below-market rents means you get to raise rents. Raising rents means you immediately raise the property value, because rental property values are based on income.
7. Complies with Zoning and Fire Codes
Have it inspected by a well-qualified inspector, and ask local officials (fire, police, building) if there are any problems.
8. Less Than 20 Years Old
This is somewhat arbitrary, but if you limit your search to newer buildings, you will be less likely to have building code and serious maintenance problems. Also, it’s likely to have the amenities most people like and/or be easier to upgrade.
9. Owner/Manager That is Out-of -State
These properties are often the best deals, because it is tough to manage a property from far away. The owner may be frustrated with the local property manager or just the whole experience of managing from far away. An out of state seller is often more concerned with a quick sale than a high price.
10. Neighborhood is Stable or Improving
Stable is okay, but if you can buy in a neighborhood that is improving, you’ll rent the units more easily, and therefore get automatic appreciation in value with time. It also means you’ll have appreciation And the opportunity to increase rents.
The above list is not comprehensive but it does include some of the common areas where buyers have missed the mark. Overall, be comprehensive in your due intelligence. You can never be too thorough. If you are a newbie, make sure an experienced multifamily investor reviews your numbers, data and underwriting before you buy.
Bill Manassero is the founder/top dog at the “Old Dawg’s REI Network,” a blog, newsletter and podcast for seniors and retirees that teaches the art of real estate investing.
