Want to buy a Rental Property?
June 15, 2020
Rental Property purchase may not be as simple as buying your primary residence or doing a fix and flip project. It is imperative that you understand your rental market because you are purchasing a long term buy and hold asset. Just one oversight is sufficient to wipe out the prospective cash flow.
One quality rental acquisition transforms your portfolio, but you need to choose the right asset for your investment. Here are five important things to consider for a successful rental property purchase.
- Neighborhood: Real estate tends to be not just local but hyperlocal. In most towns, the quality of the properties tends to vary not just by zip codes but by the streets. Blindly buying an asset could be disastrous. As a rental owner, it is important to understand what would appeal to a tenant. Basics such as proximity to the highways, major hubs and good schools could all play a role in attracting tenants. Without a steady occupancy at your property you could be facing negative cash flow. Before deciding on an asset, it is wise to drive around in the neighborhood at different hours.
- Cost of Repairs: If you are solely depending on appreciation for your gains then it could be harmful for your bottom lines in a deal. The value of an asset can certainly increase in five to ten years depending on the market. The need to secure a steady cash flow is pivotal as the operational expenses such as repairs and monthly mortgages need to be paid right away. The cost of updates on mechanicals and structural repairs could be mounting. It may take several months, even years, for your improvements to generate revenue. You need to decide if the improvements needed will be essential for the tenants and reimbursed through rent spikes immediately. If there is too much work, the numbers won’t make sense and you will be better off passing on the property.
- Know Property Weaknesses: There is no perfect asset. Even if you love your own home you would always want to tweak it to better suit your needs. Be prepared to address small issues such as the warts with a property as you are better off facing them head on. Acknowledge the shortcomings of your rental as it will help you to generate enough demand by tweaking a few things. It is fundamental to understand if there is a lack of backyard, no off-street parking, or if the area has high inventory. This may result in prolonged vacancies. It always pays off to view the rental from a tenant’s perspective. This doesn’t mean you can’t find tenants with a flawed property, but the monthly rent may not be what you anticipate.

- Understand Bottom Line: The process of acquiring a rental may seem straightforward but it is important to understand how you will create passive income from it. The amount left after you pay the mortgage and operating expenses funds is the true cash flow. You will have to take into account all the small details such as lawn care and snow removal. Simple assumptions about utilities and water bills could leave small margins at the end of the day. Hence it is important to enter a rental acquisition well informed.
- Management: If you choose to buy your rental property in your backyard and handle it by yourself be prepared to expect calls at odd hours for clogged toilets and broken shower. What if your rental asset is a few hundred miles away from you? You could either find an experienced handyman who can go in and out to handle small repairs or you could go with a traditional property management company. How you manage a property will always affect the outcome the asset produces for you. There could be long stretches where the property may not need much to be done to it, however you should be prepared to handle unexpected costs.
Rental properties are great tools for passive income but needs to be done right.