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8 Smarter Ways to Invest in Rental Property
Working with income property is a different beast entirely. Rental properties are great investments if they provide passive income and build equity. But they can turn into quagmires if the investments don’t turn out as you’d planned. As a title company that has a massive amount of experience bringing rental property deals to close free of delays, scares or surprises, we know this better than anyone.
Whether you plan to simply flip a property or buy it and hold it as a rental, it all starts with finding a great deal. Here are eight ways to do it.
Follow the 1% Rule
The price-to-rent ratio is one of the most important economic principles used to value rental real estate. Like the price-to-earnings ratio (P/E ratio) in stock investing, the price-to-rent ratio gives investors a way to separate the wheat from the chaff. It won’t tell you everything you need to know–far from it—but it will tell you at a glance if the property in question will yield an acceptable return.
The One Percent Rule holds that the gross monthly rent should be at least one percent of the property’s final price. So, a property with a final price of $200,000 should yield at least $2,000 a month in rent. A $300,000 property should rent for at least $3,000 a month, and so on. Following the One Percent Rule, it will take 100 months—a little over eight years—to pay for itself, regardless of its total cost.
Ensure the Title is Clean
Title searches and lien searches rely on public records, which means that anybody can perform a title search. But it takes a lot of experience dealing with real estate records, and a keen eye for details, to identify hidden obstructions. That’s why title examination is one of the most important steps in any real estate investment. It’s when you discover if the great deal you think you found actually is a great deal.
Inexperienced title companies will put your investment at risk. Plain and simple. Title insurance is all about peace of mind. If you don’t even want to entertain the possibility that a code violation, open permit, or municipal lien will slip through the cracks, choose a reputable title company that has actual experience helping real estate investors complete rental property deals. Work with a title company that employs real estate transaction specialists—the kind that actually bring value to your transaction. Otherwise, you’ll have a title company learning how to do a rental property deal on your dime, which is a recipe for frustration.
Keep Maintenance Costs Low
As a rental property owner, you are responsible to fix things when they break. That’s why you should seek out properties in which high-cost items like HVAC systems, water heaters, the roof, and other major appliances have a long shelf life. If any high-cost repairs are needed after you purchase the property, you might as well add those costs to the final price. Keep in mind that repairs and maintenance can sometimes turn out to be more expensive than initial estimates, so it is wise to round up when considering maintenance costs.
For beginning investors, residential, single-family homes are advisable. Condominiums are also an attractive starting point for new investors. The condo association is there to help with much of the external maintenance of the property, while you are on the hook for anything inside. It’s a trade-off though. Lower risk means lower rewards. Condos tend to yield lower rents and take longer to appreciate than single-family homes.
Check for Favorable Development
All development is not good development from the perspective of a rental property investor. Go to your local municipal planning department and see what has been zoned for the area. Find out what new developments are on the way. Parks and green spaces tend to attract renters. More activity space tends to push prices and rents up, as was the case in the four Chicago neighborhoods that line “The 606,” a new 2.7-mile running and biking trail built on an abandoned rail line. By the same token, a loss of activity space can depress rent prices, as can new housing developments nearby. Projected public transport stops, new bus lines, new parks and cafes can all be a signal for high growth areas.
Buy Only AMAZING Foreclosures
Taking advantage of the low price of a foreclosed property to turn a profit by renting seems like a no brainer. But just any foreclosure will not do. In fact, most won’t.
Does the property come with resident tenants, and if so are they the tenants you would want? Under the Helping Families Save Their Homes Act of 2009, if you buy a property that was foreclosed after May 19, 2009, and it comes with a lease-holding tenant, you have to honor the lease. Is the property subject to rent control? If so, you will have to follow the rent control ordinance’s rules for termination. Are there many other foreclosures in the area? A quick search on Realty Trac can show you the concentration of foreclosures by zip code.
If the foreclosed property does actually pass the test and look like a good deal, try and get it in pre-foreclosure, when the homeowner has received notice of default but the auction has yet to take place. That way you can negotiate a price with the homeowner instead of having to deal with the bank.
Check Listings & Vacancies
Check listings and vacancies in the neighborhood in question. A high number of listings and/or many vacancies can tell you one of two things:
- That a neighborhood is experiencing a downturn
- That a seasonal cycle is nearing its end
Figure out which one it is before you decide to make purchase. Vacancy rates are also important. Vacancy rates are what signal to a landlord whether they can raise rents or not. Too many vacancies and landlords are forced to lower rents to get tenants. Be sure to understand the level of demand in the neighborhood before making a decision.
Use Public Records
Public records > MLS.
Every real estate investor is using a multiple listing service (MLS) to find properties. Using it to gain an advantage over the competition is somewhat problematic. To find motivated sellers that are willing to trade time for money, you need to dig deeper. This means using public records searches to find people who haven’t yet decided to sell, but who are likely to. One excellent target is absentee owners. Look for houses that look vacant and use public records to find the owner. Contact them personally and see if they are willing to sell. When you see hand-written “For Rent” signs on the street, use public records to contact the landlord. Right off the bat tell them you are not interested in renting. You are looking to buy. The more you do this, the more likely you are to find true diamonds in the rough—the ones that nobody else could find because they weren’t looking in the right places.
Be a Volume Shooter
Forgive the basketball reference, but like basketball, real estate investing is a numbers game. Michael Jordan said that you miss 100% of the shots you don’t take. That’s true. You have to take a lot of shots to get in a rhythm. You need to have a ton of leads in your funnel if you want to land a lot of good deals. For every 300 leads you may only make 12 offers. From these 12 offers, you may only get one or two accepted offers. That’s ok. If you follow the rules on this list, you will get more quality leads and you will close more deals.
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