You’ve got a good chunk of money saved up, and you’re ready to start investing in real estate by purchasing a rental property. It’s a great idea and can be a very smart move, but before you jump in head-first, you need to know what to look for so that the property will be profitable.
Run the Numbers
Before you start looking at properties and putting in offers, you need to take a look at the numbers. First, you need to find out what kind of a house you can afford based on the amount you have saved. If you’re going to purchase a house with a mortgage, you need a 25% down payment on the property, plus extra for minor repairs. If you want to buy a cheap fixer-upper, you’ll probably need the entire purchase price (since most banks won’t give a mortgage on a place that can’t pass an inspection), as well as the cash to get it move-in ready. The latter is more expensive at first, but it greatly reduces your costs in the long run.
Once you know how much you’re willing to invest and how costly a house you’re willing to buy, you need to find an area where purchasing a rental property will be profitable. Look at the average rent to find out how much you’d receive each month, and then use the 50% rule to see if you’ve got a secure investment. The 50% rule basically states that your mortgage, taxes, insurance, homeowner’s association, and property management costs should add up to half of what you can get back in rent. This may sound fairly conservative, but it’s the best way to ensure that you’re making enough to cope with vacancies, big repairs, and any problems that might come with owning a rental house.
Search, Search, Search
As soon as you know what you’re looking for, get started on your search. Work with a realtor and have them set up an MLS search with your basic criteria (area, age of the house, asking price, size, etc.) so you can filter through them. Put in a lot of offers, even if they’re a good deal lower than the asking price, and see what comes up. Network with other investors in your area to find inside deals. The best way to find a good deal is to be aggressive in your search.
As real estate investor Jim Randel says, “Asking prices are meaningless.” To find a good deal, you’ll probably have to do quite a bit of negotiation. If you’re trying to find a place that fits your parameters, chances are you’ll have to put it quite a few lowball offers and do some negotiating to get a deal you’re happy with. You may have to offer to pay a higher amount if they pay closing costs, or a myriad of other combinations that gets the owner to agree, but don’t go beyond your price comfort zone. Your rental property needs to be financially viable, and you can’t make that happen if you overspend.
If you make smart choices about your investment property, you’ll find yourself making a good deal of money off of it, and that income stream could grow into a wonderful extra cash flow that will snowball over time as you purchase more properties, making more and more money. If you’re willing to work to find the best property you can, you might find yourself sitting back and relaxing as your rental income rolls in every month.
Robin Knight is a real estate blogger. If you’re looking into buying a new home as a rental, find out more about the homes for sale in your area.