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Before Buying a Rental Property

Updated January 1, 1 . AmFam Team

The dream of owning rental property can be realized, but there are some things you should consider before diving into this business venture. We’ve got some tips that will help you buy the right property for your landlord dreams.

The idea of having real estate that will increase in value and then renting that property for a profit sounds tempting. Becoming a landlord can be a lucrative business venture. But there can be downsides too. If you’re debating diving into this business, we’ve got some tips to help you determine if it’s the right move for you.

It’s All about Location, Location, Location

Like all real estate purchases, your top consideration should be where the property is. If you don’t live in the area, it’s important to get to know as much about the region as you can. What is the crime rate? What amenities are nearby? How many rental units are in the area? What are the property value trends? The answers to questions like these will play a big role in your next move.

If you’re working with a realtor, ask about the area and have them give you comparisons to other rentals nearby. This will give you an idea about real estate prices for that region, the current pricing trends and what you might be able to expect in the future. If you’re not working with a realtor, it wouldn’t hurt to reach out to one and ask them what they think of the area and the property you’re considering.

Look At Other Rentals

There’s a lot to be learned by playing detective for a little while. Do your own research and call other rentals to see what the going rate is. Ask how many open units they have and when the apartment is available. Check to see what type of tenants live there — is it mainly student housing or do they cater to retirees? Sometimes the area is oversaturated with rentals. On the other hand, you may find an untapped gem. Every area is different and checking out the rental environment is key to your success.

Get to Know the Tenants

If you’re considering a property that already has tenants, this can be a great thing — if they’re good tenants. Imagine not having to fix up a property, not having to advertise or screen new tenants. Just slipping into the role of landlord with already established renters, can be a dream come true. This does happen from time to time. But there are also people who have bought rentals only to discover that the tenants are the reason the old landlord wanted to sell.

Make sure to ask the current owner to provide you with information regarding who the tenants are, how much they pay, their payment history and any history of complaints or repairs on their units. If you’re buying a property with tenants, you’re buying the tenants, too. So do your homework.

Sharpen Your Pencil and Do the Math on Your Rental Investment

You want to make money on this investment, so some math may be required. Look beyond the cost of the property and calculate landlord insurance, property taxes, any upgrades, maintenance expenses, advertising and marketing expenses, and more. Then, look at how much you could make. Is it already a rental? What is the rental history? What do other properties in the area rent for? Plot it out for the next few years.

There are two basic rules of thumb used to determine if a rental is a good investment. These are certainly not hard and fast rules, but just meant as a guideline to help you weigh your options. One line of thinking suggests that if one month’s rent is equal to or greater than 1% of the property’s value then it’s a good deal. The other way of looking at it is, if the rental income pays off the mortgage in 10 to 15 years, then it’s a good deal. Remember, these are just generalizations, but this math should give you a better overall view of the property’s value and potential.

Have the Property Inspected

Like all dwelling purchases, one of the smartest things you can do is have it inspected to see if there are any issues you can’t see on the surface. Big things can go wrong in a home and replacing a furnace, a roof or dealing with termites can be expensive. Having a licensed home inspector review the property from top to bottom gives you a much more in-depth view of the structure and its condition.

Most real estate purchases and landlord business ventures are more like a marathon than a sprint. The more equity you can establish in the property, the better your profits will be, until one day you no longer have a mortgage. Having a realistic view going in and buying only properties that fit your business plan gives you an advantage and puts you on the path to success!

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