Have you ever considered the possibility of investing in a rental property? Does the idea of making hundreds or thousands of dollars in additional monthly income excite you? While investment properties are certainly able to generate additional revenue for you and your family, there’s no guarantee.
In order to be successful in this niche, you need to know what to look for in these investments. Just because you find an online listing for a property at a convenient price point, doesn’t mean it’s a good real estate investment. There’s a lot to consider before proceeding. In particular, you’ll want to heed these six tips for finding a profitable rental property.
Know Your Limits
A lot of amateur investors make the mistake of settling on a budget after they’ve started looking for properties, but this is backward. You begin with a concrete budget in mind; otherwise, you’ll overspend and put yourself behind the proverbial eight-ball.
Every situation is different, but you should aim to put a minimum of 20 percent down on a rental property. This will help you avoid PMI (which can cost you hundreds of dollars per month) and increase your monthly cash flow.
Identify the Right Locations
As you’ve heard before, location, location, location is the most important aspect of real estate investing. Before zeroing in on specific properties, you need to understand your local market. Experienced investor Arthur Garcia believes every market can be divided into three classes:
- A Class. These are neighborhoods that are predominantly owned by homeowners. Houses and lawns tend to be well-maintained. The streets are clean, children play in their yards, and neighbors trust each other.
- B Class. The majority of neighborhoods fall into this category. There’s usually a healthy mix of renters and homeowners and the majority of residents work in blue-collar occupations.
- C Class. These neighborhoods are primarily occupied by renters and tend to be more rundown. There may be high crime rates and low unemployment. It’s much harder to keep good tenants in these areas.
There are pros and cons associated with renting in each of these classes. The key is to know the difference between them so that you assign the correct valuation.
Understand the Market
In addition to differentiating between classes of neighborhoods, you also need to have an idea of the larger trends within the market. Are housing prices increasing? Is there a big demand for rentals? Are certain areas declining while others are appreciating? You have to think long-term.
Buy Below Market Value
It’s not uncommon for an inexperienced investor to make an emotional decision and purchase a property that’s more than they can afford. The assumption is that their tenants will pick up the slack, but this is risky!
As Houston investment property expert Green Residential explains, “There is no guarantee that you’ll always have tenants, or that maintenance costs and current market competition won’t drive your income down and leave you short of the funds you’ll need for the mortgage payments.”
You make your money when you buy – so purchase below market value.
Know the Difference Between Easy Fix and Fixer-Upper
You’ll almost always need to perform some basic work when buying a rental property, but you should know the difference between an easy fix and a fixer-upper. Easy fixes are tasks like painting walls, replacing a microwave, and repairing a drywall hole. A fixer-upper needs thousands of dollars of work just to become livable.
Be a Patient Investor
In real estate investing, as in life, patience is an irreplaceable virtue that must be respected and cultivated. It’s one of the key fibers that makes up the fabric of success in this industry. Without it, you could easily find yourself underwater – closer to bankruptcy than financial freedom.
Patience shouldn’t be confused with laziness or risk-aversion. Rather, it’s the willingness to be cautious in the face of risk – analytical instead of emotional. A patient investor waits for the right time to make a move and is quick to turn away a sour deal.
While some people are naturally more patient than others, it’s possible for anyone to develop this virtue. It takes time, commitment, and restraint, but will ultimately yield positive returns – most noticeably in your bank account.