if you think to buy an investment property on Zillow or owning rental property you need to keep in mind some points before do this step.
Owning rental property can be a wonderful and profitable experience, especially if you invest wisely and understand the fundamentals of rental property management. If you’re thinking about buying investment property, here are six things you’ll need to do first:
- Choose your location
- Know the market
- Understand changing neighborhood dynamics
- Decide on financing
- Look for the right kind of bargains
- Calculate the total cost of your investment
None of this is rocket science, but the income from your rental property is affected by all these factors. You can look for properties selling at a deep discount, but making price the most important factor is rarely the best approach. Other market-related factors can create high vacancy rates or fluctuating rents.
Here’s more about what to consider in your rental property search. Check them all off your list, and you’ll be well positioned to have a great investment.
Choose your location
In real estate it’s all about location. Normally we think of buyers as being concerned about where they purchase property, but renters are choosy about location as well. According to the Zillow Group Consumer Housing Trends Report 2017, many of the required and desired characteristics renters look for in a new home are tied to location.
For example, families with children are likely to look for a rental home in their preferred neighborhood (78 percent) or school district (67 percent). Forty percent of all renters list proximity to work as a desired feature of their new rental home, with 30 percent listing it as a requirement.
It may cost you more to buy investment property in an area of high demand, but you can charge higher rents to make up for it.
Know the market
When considering a location, think about market factors as well. You want to buy in areas where people want to live, but there are many areas that can fit that description.
Research the relationship between home prices in the area you’re interested in and the prevailing rents. Look at listings and get in touch with landlords as if you were a prospective tenant. Ask about home features and rents.
Keep a spreadsheet of these factors by neighborhood and update it before making an investment, whether it’s your first property or the next of many, because markets change. By doing this, you’ll also know when it’s time to increase the rent.
Determine your total cost
Calculate your total costs as accurately as possible. You’ll know the current property taxes, but check the history of tax increases in the area and factor that into your decision. Make a realistic estimate of immediate and long-term repairs, maintenance costs and major equipment replacement, such as air conditioning or a furnace.
Set a marketing budget as well. A big part of your job as a landlord is to fill vacant units as quickly as possible, and rental advertising is the best way to do that. And speaking of vacant units, you need to estimate vacancy and credit costs moving forward. For example, living in a rental causes wear and tear. What will it cost to do repairs or renovations before the next tenant moves in?
How often do you anticipate vacancies? If you live near a college or university and rent to students, you might see turnover every year. Also factor in the cost of financial hardships. They can happen to anyone, causing late or even missed rent payments to you.
Evaluate the risks of changing neighborhood dynamics
Why do people choose to live in certain neighborhoods? If it’s tied to employment at a single major business in the area, there is always a risk of that employer leaving the area or laying off workers. Just as you would diversify your stock portfolio, it’s better to reduce this type of risk by choosing neighborhoods with a variety of employment opportunities — as well as other desirable characteristics, such as schools and restaurants.
Also investigate potential zoning changes. In some older neighborhoods, new zoning rules could allow conversion of homes to commercial spaces, changing the character of the neighborhood and potentially reducing rental demand.
Decide whether to finance or purchase with cash
One of the benefits of investing in rental property is being able to leverage your mortgage financing. For example, instead of paying $150,000 in cash to buy a single property, you may decide to finance three properties with a $50,000 down payment on each.
But carefully consider your situation before doing this. Your net profit from each rental will be lower because you’ll have a mortgage payment, reducing your cash flow. If one or more of your tenants moves out suddenly or has trouble paying the rent, would you still be able to afford your mortgage payments?
Look for bargains — in the right neighborhoods
While price shouldn’t always be your primary consideration, any seasoned investor will tell you that a successful investment begins with a purchase below current market value. Learn how to value homes or apartments like a professional real estate agent, then set your discount goal and stick to it. If it’s a foreclosed property, be sure to factor in the costs needed to make it ready to rent, such as repairs or renovations.
Aim to buy below current true market value and at as deep a discount as possible. This guarantees a profit from the first day of ownership and increases your rental cash flow.
Along with price, consider a neighborhood’s history of property appreciation. Some areas do better than others, and paying more for a home in a neighborhood that appreciates faster is a great move. Someday you will be selling, and you’ll get a nice big check at closing from a property that’s gone up in value.
Remember: It’s all worth it
Being a successful landlord requires a lot of due diligence. But if you do it right, you can enjoy handsome returns for many years — and a profitable sale when you’re ready to liquidate or roll up to a higher-value property. Happy landholding!