How to Invest in Rental Properties
It’s as important as ever for real estate investors to consider adding rental properties to their portfolios. Most of you reading this are probably sticking to the “buy-rehab-sell” house flipping technique, which is a lucrative strategy, but smart investors in any industry will tell you to diversify your portfolio for the best long term results. For the real estate investor, adding a few “buy-and-hold” rental properties is a great way to do this. While the early stages of becoming a landlord can be intimidating, we’ve come up with a list of tips on how to invest in rental properties:
Calculate The Purchase and Rehab Costs Differently When Buying a Rental Property
The key here is to remember that the purchase and rehab numbers for a fix and flip would be projected much differently than for a rental property. For a flip, we like to see our investors look for a property for which the purchase price and rehab costs combined fit within 65 percent of the after repaired value (ARV). We look for this profit percentage because it provides the best chance for a successful flip – meaning you will MORE than break even.
When the exit strategy is to hold the property as a rental, it is not a deal-breaker if the total project costs exceed 65% of the after repaired value. For rentals, property cost and profit calculations are more relative to the income you will generate after rehab. What you pay upfront (purchase, rehab, and refinancing fees) is not as important on a rental property if the investment will set you up with long term income.
Don’t Over-Improve the Property for Tenants
We recently visited a property where the investor’s exit strategy was to sell. The property was nicely rehabbed, but one thing we noticed was they had used formica for the countertops. We had to suggest bringing in quartz or granite instead. Formica is a cheaper product, although one that still looks very nice. The sight of formica would have discouraged the end customer (homeowner) and very well could have been a deciding factor to move onto another property. In contrast, a renter isn’t overly concerned with things like this because they aren’t as invested in the property or its condition over the next 30 years. As the landlord, depending on the area, of course, why install something that will cost you double the price, when the cheaper option more than gets the job done? Repair economically; Repair wisely.
Keep a Renter’s Mindset When Choosing Both the Property and Improvements You Make to It
Renters and buyers have different mindsets when looking for a home. While buyers see themselves as making a long term commitment and want to fall in love with a property, renters are looking for something functional, low maintenance, and convenient for right now. When buying, an end customer will be extremely particular about the property’s characteristics; countertops, vanities, flooring, lighting, appliances, curb appeal, room size, and much more. Those whom are looking for a place to rent look for the same characteristics but won’t place nearly as much importance on these things as those who are buying. More relevant concerns for renters include:
Is it in a location I can afford?
Is it convenient for me to get to the places I want or need to go?
Know How to Advertise Your Rental Property to Prevent Vacancy
What is the best way to keep your newly rehabbed property from staying vacant? What platforms should you use to advertise your property? Research the demographics of your market to see how renters are finding places to live.. How does someone in that demographic approach finding a place to rent? Social media, Zillow.com/Realtor.com/Trulia.com etc., Newspaper, etc.? It is up to you to find out and advertise accordingly. Note: Most realtors are not interested in listing a rental property so you’ll have to do most of the work yourself.
Where to Invest in Rental Properties
The point of this article is to encourage you to research every facet of the rental market — this tip is no different. There are websites that are out there designed specifically to evaluate the ratio of homeowners and renters in a particular zip code/area or even city. Use this to evaluate if it is wise to purchase a property for the specific exit strategy of keeping as a rental. If the area is heavily populated by homeowners, look elsewhere. There is a reason for that. There are plenty of resources to use now that real estate investing is so widely regarded as a lucrative investment strategy, you just need to find them.
Know the Risks and Headaches of Being a Landlord
With any investment, there are risks involved. Rental properties can sit vacant if you do not advertise properly. You may have to evict a tenant, causing you to spend money in legal fees or missed rent payments. One of the most renowned headaches many landlords are plagued with is the constant damage to the property, which ranges from small repairs like a leaky faucet to large repairs like a damaged roof. It helps to be handy yourself, but if you arent, be sure to have someone available at all times to fix these problems.
Learn from the Experienced Rental Investors
This is just another reason why attending real estate investing events is so important. You make contacts at these events but more importantly, for the purposes on this article, you absorb an abundance of knowledge on how to invest in rental properties from current landlords. There plenty events which concentrate on this specific topic, but even if they do not, chances are you will meet someone that has a rental portfolio and would be more than willing to answer any of your questions.