let’s talk: TOP 5 THINGS TO LOOK FOR WHEN PURCHASING A RENTAL PROPERTY
One of the most fun things I do in real estate investing is look for new properties. AND, seeing as our group up in NY is currently on the hunt for a new multi-family, I thought it may be a good time to discuss what we look for when investing in a new property.
So, as we do, let’s talk Real Estate, let’s talk TOP 5 CHARACTERISTICS WE LOOK FOR IN A NEW RENTAL PROPERTY…
#1 LOCATION, LOCATION, LOCATION
Location is EVERYTHING. Now, you may read “location” and think it has to be the best house, or the best block, or be located in the most exciting city. That is not exactly true. When I look at location, I am looking to see if this property makes sense where it is located. Is there a thriving job market or university near by? Is it close to public transportation? What percentage of the population is made up of renters? Is the neighborhood safe?
For example, we purchase in a city where the percentage of renters is high AND there is a growing local university near by. This almost double ensures us that rental properties are needed.
#2 THE NUMBERS
Do the numbers work? Does my rental income cover my expenses?
Here is what we look at:
– Mortgage & interest payments
– Estimated repairs (we estimate ~$200/month)
– Property management fees
– Utilities covered by the landlord
= Projected Profit
#3 LOW MAINTENANCE
Is this property going to require a ton of repair work? If so, can you repair most of it upfront? Will the value of the property still be greater than the purchase price + repair cost?
We purchased a triplex about a year ago that has ended up costing big $$$ that we had not budgeted for… luckily, the rental income for the group was been able to cover most of these expenses. We tried to handle most of these repairs as quickly as possible because typically, low maintenance properties, attract more long term renters!
#4 POTENTIAL FOR APPRECIATION
Are you buying this property at the height of the market? We ALWAYS try to buy below market value OR just at market value IF we truly believe the market can only go up! If there is any chance at all the market may dip, regardless if the numbers work, we will most likely not pursue the deal.
For example, we looked at a rental property up in Binghamton last year where, at the agreed upon purchase price, the numbers cash flowed beautifully. HOWEVER, when we got the property appraised, the appraisal came in $40,000 BELOW what we had agreed to purchase the property for. Even though we believed the property would in fact still appreciate, AND the property still cash flowed, that $40,000 discrepancy was WAY too risky for us, and, in the end, we backed out of the deal.
#5 IS THE PROPERTY CURRENTLY RENTED?
While this is not always a requirement for us, it does help us when it comes to financing! Typically, if a bank is lending on a rental property, they want to see that the house is already rented out and that the rental revenue covers the monthly mortgage payment. So, if we have to finance a new rental property, a lease in place is typically a requirement. Plus, it helps with that return!
If the house is not rented at the time of purchase, and we are able to still purchase the property with cash, we try to fix it up and get on the market ASAP. With our most recent purchase, we closed on it in mid March, held an Open House the weekend we closed on the property, and had tenants moved in by April 1! We were then able to take this house to the bank to pull the cash out almost immediately after we had purchased it for all cash. The best part about this deal was, it appraised for way more than we had purchased it for, so we got almost all of our cash back!!
Hope this helps you all if you are looking to purchase your first or next rental property. If you are already an avid investor, what do YOU consider when purchasing a new rental?!