In spite of the current condition of the real estate market, investing in a rental property can still provide you with a decent income if you perform the due diligence necessary to find the right property. That means you’ll have to analyze a number of factors before you decide to buy.
The first factor to consider is the rental’s location. Your experience as an investor is going to play a major role in where you should look, says Ben Spofford, President of
Realtyrto.com, a company that provides rent-to-own real estate. An experienced investor can find a gem in any neighborhood, but if you’re just starting out, Ben recommends looking in your own backyard because you need to understand in what type of neighborhood you’re investing. For example, knowing if there are advantages like easy access to transportation, schools, and shopping malls will tell you the types of renters the property will be best suited. Once you determine who the possible renters are, then it becomes a question of finding the lower priced homes in the area. Starting off with a house that is on the low end of the price range for the area gives you a chance to learn without putting everything on the line.
The next thing to consider is the condition of the property. Any property is fair game as long as it isn’t condemned, says Ben. He added that buying a fixer upper isn’t necessarily a bad idea; however, it can present a big challenge for the new investor who isn’t in the trades. If your background doesn’t include experience in the construction industry, says Ben, then you need to put together a good team who understand the various aspects of the home’s construction, so that they can determine what the necessary upgrades are and what those upgrades will cost. Ben used the following anecdote to illustrate his point, “In Cleveland where I do some work, the homes built in the 30s and the 40s were made from plaster and lath. In the 50s, this process was replaced with plasterboard. The cost to upgrade these older homes is greater than for the newer ones.”
As to whether or not you should purchase properties at or below market value, Ben responded that in this current economy, market value is extremely difficult to determine because it changes from street-to-street and neighborhood-to-neighborhood. Once again, the renter will be the determinant of the market value. Ben noted that you can have a property on a street that is a cul-de-sac, with no kids, and good lighting that can be highly desirable to a certain type of renter, which increases its worth.
If you’re considering a property that already has tenants, it’s important to find out if the rent they’re paying is at or below market value. Ben cautions investors from buying a property where the tenants are paying below market value rents unless you know that the supply of desirable rentals in the area is low, and that demand will increase in the future because this will allow you to raise rents to make them consistent with what other landlords in the area are getting.
When it comes to financing, Ben says that anything that is owner financed is a superior investment unless your costs for items such as interest on the loan, taxes and insurance result in a negative cash flow, then the property isn’t a good opportunity. The only exception is if you purchase the property with enough of an equity cushion, meaning the amount of surplus equity you hold in collateral beyond the amount of the debt, so that you can sell the property quickly at a later date.
And speaking of finances, you will need to do a comparative market rent analysis to see the amount of income you can anticipate. Ben says that this relatively simple because there are a number of sites on the Internet like that provide the tools to do this, such as
Rentometer.com.
Ben concluded his remarks with a final tip for the new investor, ‘You can get better rent with a subsidized program like Section 8 than you can renting to non-subsidized tenants.” So it’s a good idea to become involved the program as soon as possible.
Additional Resource: Rental Investment Performance Calculator