Buying rental property can be an excellent decision and the better informed you are, the more likely you’ll have favorable results. The following suggestions can help you with your decisions.
Real estate is a long term investment affected by supply, demand and the economy. It isn’t an investment that is easily converted to cash. The costs to acquire and dispose of real estate are sizable and need to be spread over years to minimize their effects on the rate of return.
Invest in average price homes for specific localities or slightly below average price to appeal to the broadest market not only when you are renting but later on when you sell it.
Lower-priced homes will rent for more relative to higher-priced homes. There is an inverse relationship between rent as a percentage of the price. As the price increases, the rent as a percentage of the price decreases. For example (only, and not necessarily indicative of actual market rate for rental amount), a $200,000 home might rent for $1,750 a month or 0.88% where a $400,000 home might only rent for $2,250 a month or 0.68%.
If possible, choose predominantly owner-occupied neighborhoods because when you sell the home, it will appeal to a homeowner who will most likely pay a higher price for the home. Homes in predominantly tenant-occupied neighborhoods tend to sell to investors who pay lower prices and will not be emotionally involved with the purchase. This said, it’s important that you maintain your investment as if owner-occupied to help support the other owner-occupied values around your property.
Purchase a property with the idea of selling it in mind. You may be able buy for a bargain price today, but if it is due to a functional obsolescence like a bad floor plan or not enough bathrooms, that problem will still there and you may need to sell for a bargain price unless the deficiency can be rectified. Identify what the problem is and what solutions are available. The property may rent fine, renters are usually more transitory and accepting than buyers, so just be sure you look far enough down the road towards your long-term objective.
Get the home inspected before you purchase it. Having the property checked out can save thousands in unanticipated expenses. Recognize that the most deeply discounted properties are typically distress sale properties, typically sold “As Is” and as with other types of investments, high reward potential and high risk are hand-in-hand.
Consider getting a home warranty on your rental. The annual premium can limit the out of pocket expenses for repairs and maintenance.
Risk can be minimized by understanding the investment and what is involved in the acquisition, operation and disposition. For the typical homeowner, rental property is something that they can relate to because of the similar attributes of the home they live in. For the same reason, focusing your attention within a reasonable distance of home and the neighborhoods you’re most familiar with can make a lot of sense.