Ten tips for buying rental properties

Buying rental properties is a good way to increase your wealth. However, choosing the right rental property will be a challenge. Here are some things to check before purchasing a rental property.

1. Location: Most people don’t want to live on Blessing Docks. The location of your rental property will determine how easy it will be to rent. If you have a lot of vehicle traffic, you may get a higher response from a sign in place than from a newspaper ad.

Renters want to live in nice neighborhoods close to all the amenities. They want to be close to schools, stores, recreation, hospitals and work.

I haven’t met anyone who wants to live in a slum or drive 15 minutes for a gallon of milk.

2. Numbers – When buying a rental property, you want to check the numbers. Make sure you have all the expenses associated with that property and make sure it is still cash flow positive.

Factor in maintenance issues, utilities not covered by the tenant, and write off the cost of big projects like furnace replacement, new roof, siding, or landscaping.

These projects only happen once every 15-20 years, but you might get to this in the 10th year of that cycle. Remember to calculate your high expenses and your low income. This can save you some surprises in the future.

Expect the unit to be empty at least one month a year due to turnover. You will have to repaint and clean the carpets the first 2 weeks, then advertise and display the next 2 weeks. You only need to have 11 months of rent per year.

3. Low-maintenance buildings: You want to avoid houses that require expensive routine maintenance. Some examples would be houses that have cedar shingles or siding, buildings with wood walls, wood-framed windows, brick driveways, cedar decks, etc.

Try to look into the future and determine future maintenance needs. Remember that the lower the maintenance, the less headaches and the higher profits.

4. Higher house prices – Check in cities with higher house prices, as this increases the demand for rental properties. Look for the ugly house on the block that has the lowest price, allowing you to buy within the margins.

After some interior and exterior painting, some light landscaping and new window coverings, viola’, a home that will command a premium rent due to the class of the neighborhood.

If people cannot afford to buy such a house, they will have to rent it. This will create a demand for rental properties.

5. Below Market Rental Prices – When purchasing a rental property, look for a rental property that has below current market rental prices. This will allow you to raise the rent and increase the value of the property. As mentioned above, this may just need some fluff to allow the rental price to increase.

The market value of the rental property is determined by the amount of income received from the rental property. Keep in mind, however, that if the rental property has tenants when you buy it, they may not like the rent going up. Also check what kind of lease exists. The lease goes with the sale.

If the current tenant is paying below standard and has 1 1/2 years left on the lease, it could be a losing proposition.

There is only one way to shorten a lease as a new owner. You must remodel the place. Check with your local housing commission to see what the minimum remodeling cost requirements are for immediate eviction for current tenants. It typically costs as little as $10,000.00 in remodeling costs to get a remodeling eviction. By the way, you didn’t hear this from me!

6. Good rental history – Whenever you buy rental properties, you should check the rental history. Check to see on average how long tenants stay and if they pay rent on time. Some areas of the city are naturally fast turnover times. Near airports, noisy bars or nightclubs, near military bases, etc.

7. Complies with zoning and fire codes – Be sure to check if local officials require inspections for rental properties and if this property passes those inspections. You never know the real reason the current owner is selling the property.

It may need extensive repairs to pass inspections. A quick red flag would be if the power has been out for more than 90 days. They will typically require an inspection prior to restoring power, especially if it is a known rental.

8. Less Than Twenty Years – This is pretty self explanatory, if you restrict your selection to buildings that are less than twenty years old, you will limit the chances of the building having any building code or maintenance issues.

The building might be close to cycle maintenance for the roof, paint, and possibly the furnace, but the structure will be solid and won’t need upgraded windows, siding, or cement repair.

9. Out-of-State Owners or Managers – When shopping for rental properties, look for properties owned by out-of-state owners. Out-of-state rental properties are difficult to manage, and when they do come up for sale, owners are often more concerned with selling quickly than getting the best price.

To rent a place quickly, you must live nearby so you can show it at the request of the caller. Many times they will ask to see you in the next 20 minutes or so. Take care of their requests and show it quickly. Most tenants need a place within the next week and won’t wait to see their place until next week because it’s booked.

Most of the time they will make a decision before tomorrow, when it would be more convenient for you to show it. This has happened to us many times.

Never give the address of the drive bys. Prospective tenants will ask for directions for a tour and just look at the place. Don’t waste your time with these people. Insist on showing it within 30 minutes or you won’t give the address as a courtesy to neighbors.

10. The neighborhood is stable or improving: Obviously avoid neighborhoods that are in decline, look at the writing on the walls and stay away. Although these may look good due to the low purchase price, they are very difficult to collect rents for.

By finding neighborhoods that are stable or improving, it will be easier to rent the property and you will be able to increase the rent. The general consensus is that the better the neighborhood, the higher the purchase price and the higher the rental price, so the profit margin is higher. The poorer the neighborhood, the lower the purchase price and the lower the rental price, which reduces profit margins.

Don’t be afraid to buy better places for rental properties. People who can pay $1000.00 per month are more likely to pay their rent on time compared to someone who can only pay $350.00 per month. A little hassle in the latter case and you won’t get your rent on time, if at all. There is much more stability in renting high-end places as opposed to being a slum lord!

Copyright (c) 2007 Brian Ankner All Rights Reserved