When done correctly, buying rental property can significantly increase your earnings and provide a better future for your family. However, before making your investment, when buying rental property it is very important to investigate certain key areas to ensure you are buying wisely. If you bear the following in mind, it will give you good understanding on what to look out for.
Location: When buying rental property, the first thing to take in to consideration is location. If it is in a nice area and is busy with traffic and people walking by, a ‘for rent’ sign is far more likely to attract interest than say, an ad in the local newspaper. Also, check to see if there are other businesses thriving in the area.
Less than 20 years old: Although this is not always the case, normally, the newer the construction, the less likely it is to have maintenance and building code problems.
Costs and expenses: It is very important to take all expenses in to consideration to make sure it makes good business sense. Remember to add all mortgage payments, insurance, administration costs, reserves, utilities and taxes. Be sure to be realistic when it comes to reserves to carry out any repairs or remodeling necessary.
Owner/property manager that lives out of town: If the owner lives in another part of the country, you may find that they are more willing to sell for a lower price instead of having to pay maintenance costs themselves. They tend to be more interested in selling their property quickly than looking for a higher price.
Neighborhood is stable or developing: If improvements or developments are being made to the neighborhood your property will rent more easily and will increase in value over time.
High real estate prices: If real estate prices in the area are high, people are more likely to rent because they can’t afford to buy.
Good rental history: When buying rental property, you should study the building’s rental history to find out how long people stay and to make sure they have been paying on time.
Rental price: There are plenty of properties that are priced below market value, which means, upon purchase, you can raise the rent. This also means that the value of the property immediately increases because the value of rental properties is directly proportionate to income.
Low maintenance costs: Properly consider the additional maintenance costs of buildings that have cedar-shake roofs or buildings that are of wood construction. It is important to think about how much maintenance the building will need – is there a lot of plumbing to be done or inner walls to be repaired? Buildings that will likely cost you more in maintenance costs are those that have elevators, flat roofs, basements or a lot of stories and stairs (like apartment buildings). The larger the unit, the higher the maintenance costs. If the unit is very small, for the singles market for example, you will have more people moving in and out, so your maintenance costs will increase due to cleaning, showing and painting. Medium sized units in a desirable location will cost less to maintain and you will likely have fewer vacancies.
Fire and zoning codes: It is vitally important you have the building inspected on your investment property and ask local officials if there have been any problems in the past.