With record foreclosures, falling home prices, cheap financing and rising rents, many would-be investors are considering the purchase of distressed single-family houses and apartment buildings as rental properties. As a long-time real estate owner, I myself have often profited from this strategy. However, today’s volatile market can be fraught with hazards for those who do not choose their properties with care. If you are looking into becoming a landlord, whether you are a first-time or seasoned investor, consider these valuable tips before you buy.
1. Plan Your Income
Many novice investors wrongly calculate that as long as there is money left over after the mortgage payment, they will enjoy a positive cash flow. However, there will always be additional costs such as maintenance expenses, property taxes and other bills that cut into your profit. Plan for 50% of your income going toward these expenses before your mortgage payment, so you can break even on the property over the long term.
2. Choose a Stable Location
In parts of the country where foreclosures have run rampant, many properties are selling for a song—which can be a tempting trap for the unwary investor. Do your due diligence before jumping in: research online at www.localmarketmonitor.com, consider unemployment rates as a factor of attracting qualified tenants and tour the area for vacancies, excessive free rent offers and other signs of anxious landlords.
3. Know the Rental Potential
Just because it looks like a good bargain doesn’t necessarily mean it will produce an adequate rental income. Ask the current owner if there are any existing records of the property as a rental, so you can determine past income. If it has no rental history, you may be able to determine the neighborhood’s occupancy rates and comparative rents through a website such as www.finestexpert.com. You can also use Craigslist, but must be very specific about that comparable unit being in the same neighborhood.
4. Anticipate Vacancies
In some markets where prices have dropped significantly, make sure to assume a 20% vacancy factor. Between actual vacancies and any incentives you may offer, this is a reasonable rate to expect. While experts recommend working your way up to having a three-month cash reserve on hand in case it takes you that long to find a tenant, in my experience, it is best to build these numbers into the purchase from the beginning.
5. Buy Local, If Possible
While the deals in another city or state may be attractive, bear in mind that the farther your properties are, the more difficult they will be to keep an eye on, even if you hire a property manager. If you can, stick close to your geographic area; unfortunately, for many of us, this isn’t a realistic option. Remember, if you want to buy out-of-state, it requires TONS of research, and I’d only recommend it if you happen to have a family member or friend who lives close by. They can give you a local's perspective of the market, let you know which areas are preferable, evolving or dicey and keep an eye on your property once you buy. While you can get this information from a real estate agent, they may not be as unbiased as a friend. Also be aware that your property is likely to be run less efficiently. This does not mean you should not buy out-of-state…just be prepared to do the work required.