If you’ve never owned or managed a rental property, it’s easy to see why you might think that every rental is guaranteed to generate healthy returns. However, as any experienced real estate investor can attest, this is far from the case.
As such, anyone in the market for a good rental property would do well to put sufficient thought into every prospective property purchase. To help ensure that your first rental property is a profitable investment, put the following pointers to good use.
Confirm That the Property is Located in a Profitable Area
There’s no mystery as to why so many real estate investors regard location as vitally important. Simply put, properties in areas that have ample demand for housing tend to generate much healthier returns than properties located in areas where demand is minimal to nonexistent. So, before closing the deal on your first rental property, confirm that its location is a favorable one.
To do this, you’ll need to take a close look at such factors as population, median income, home prices and rental rates. This will provide you with a clear picture of how in-demand an area is and help you determine what a property that’s caught your interest is truly worth.
Make Sure the Property Undergoes an Inspection
While fledgling investors may believe that doing a personal walkthrough of a property constitutes an inspection, this is far from the case. Any rental property you purchase should undergo a meticulous inspection from a certified pro. This will ensure that you’re made aware of any outstanding issues with the property before making your decision. Furthermore, if you’re looking to have the property insured, an inspection may be a requirement for doing so.
The results of a formal inspection will also show you how much work a property requires. Once you’re aware of any repairs/renovations the inspector has recommended, obtain contractor estimates, present them to the seller, and request that the cost of addressing any outstanding issues be taken off the asking price.
In addition, if a seller attempts to dissuade you from having a property inspected, stand firm and make it clear that without an inspection, there can be no sale. Even if you’re afraid that this will imperil the sale, it’s better to set your sights on other rentals than take a chance on one that hasn’t been inspected.
Weigh Projected Profits Against Monthly Expenses
It’s important for investors to understand that being able to buy a rental property doesn’t always mean you can afford to maintain it. This is doubly true in the case of multi-family properties that contain dozens – or hundreds – of units. In other words, the larger the property and number of residents, the more you can expect to spend on maintenance and upkeep costs.
Unsurprisingly, the upkeep costs associated with small single-family properties tend to be much lower than those associated with large multi-family rentals. For example, if you’re fairly adept at property maintenance and handyman tasks, you may be able to do a lot of heavy lifting yourself. On the flipside, when dealing with larger properties, you may have no option but to recruit full-time maintenance personnel.
The more units a property contains, the more maintenance requests you’re likely to receive. And no matter how new or well-maintained a property is, it’s bound to require regular repairs and renovations – particularly if it has a large number of residents.
So, before committing to purchase a rental property, carefully calculate the projected maintenance costs and weigh them against your monthly profits. This will help you determine how much rent to charge, as well as how much you can reasonably expect to make from the property each month. If you stand to make a handsome profit in spite of high maintenance costs, you’re likely looking at a sound investment. Additionally, if you’re unsure on how smart an investment a certain property represents, take care to consider the one percent rule in real estate.
Negotiating the Purchase of a Profitable Rental Property
When purchasing a rental property, it can be beneficial to negotiate a good price, as this can create long-term profits. Regardless of the market, there are certain principles that will help you close a successful transaction.
The first step is research: You need to do your homework and understand the local real estate market. Know what other properties in the area have recently sold for and pay attention to trends in rental prices. This will give you a good idea of what kind of property you should look for and set an appropriate mindset for negotiations.
The next step is setting your limits: Do not let yourself get carried away by emotion or impulse decisions. Set yourself a price limit before beginning negotiations; this will ensure that you stay within budget and cost yourself nothing extra in the process.
Once you’ve settled on a target price, it’s time to approach the seller with your offer: Be sure to explain why you want to purchase their property, as providing an explanation could make them more likely to accept your offer or even counteroffer with a better one. Keep in mind that sellers are also looking for profit, so don’t make an offer too low.
Finally, if you get into disagreements about certain issues during negotiations, don’t lose control of your emotions; remain calm and keep discussions civil so both parties can stay focused on reaching an agreement that satisfies everyone involved. It could be wise to employ the assistance of an experienced negotiator or agent who can help guide both parties through each step of the negotiation process until an acceptable outcome is reached without creating animosity.
You should never assume that a rental property will turn a profit without first doing your homework. While some rentals are likely to generate healthy returns, others will serve no purpose outside of draining your finances. To help prevent yourself from winding up with the latter, make a point of exercising discernment and remembering the tips outlined above when seeking out potential investment properties.