There are three things you need to be thinking about when buying a rental property, and they’re not quite as obvious as you might think.
Today I’d like to address the three most important things to think about when purchasing a rental property: Price, location, and condition. There are some pretty obvious details about each of those qualities, but there are also some not-so-obvious things I’d like to focus on.
Obviously, you want the math to check out—the goal is to make enough on the rent to have enough to cover property management fees and maintenance so that you have positive cash flow by the time all else is settled.
But that’s not what I’m focused on; rather, you need to think about price as a determining factor in whether or not you should purchase a specific rental property. Is it at a price point with growth, or is it stagnant? Certain price points are capped due to factors like location and condition. You can expect not to see much growth in an $1,800 rental in South Dakota. Now, a rental with similar square footage in Bonney Lake will have much more room for growth in rental prices.
In real estate, you know the saying, “Location, location, location.” You want to make sure the property is in a good school district, is away from main roads, has a good-sized lot, etc.
However, the points I’d like to talk about today are rentable area and owner-occupancy rate. There are very nice areas here in the South Sound that make horrible rental markets because the owner-occupancy rate is insanely high. It’s too expensive for renters to rent there and still make any money. Just because the property is in a great location and is in great condition, it doesn’t mean that it will make a good rental.
You don’t necessarily want to focus on whether the property is in good condition now—you want to think about what it will cost to maintain the place over the next five or 10 years, or however long your holding period is. When will things like the roof, furnace, and hot water tank need to be replaced? How are the fixtures holding up? Are they energy-efficient? Will these things degrade over time? All of those items will cost money to replace and they’ll decrease the quality of the tenants you’re attracting.
If you have any questions about making a home into a rental property, feel free to reach out to us. We’d be happy to help.