Choosing the Right Rental Property for your Portfolio
June 15, 2010 · Published By Tanya Marchiol
Lower inventory and an increase in local real estate prices are leading real estate investors to buy property for rental income rather than to flip for an instant profit. Part of the dynamic of successful real estate investing starts with deciding your goals and then choosing properties which will meet your goals.
If you are focused on cash flow, you may want to invest in a three-plex or four-plex building so that you are assured of a constant stream of rental income. If you are more interested in property appreciation, a single family home will be a better choice, since that type of residence will rise in value faster than a multi-family building.
Due diligence and intuition are the twin elements of choosing the right rental property. Your due diligence requires developing a spreadsheet for each potential investment property, something we create for every client here at Team Investments. We always begin by assuming a 20% down payment since mortgages for investment properties with a lower down payment are few and far between in the current credit atmosphere. Qualifying for an investment property mortgage also requires decent credit.
Your rental property spreadsheet should also take into consideration taxes and homeowners insurance, since these are costs you will incur regardless of whether your property is occupied. In addition, we estimate a 10% vacancy rate, 10% of the property costs for a management fee and 7% for repairs. These numbers are high estimates so that the investors are prepared for the worst scenario but are more likely to be able to keep more of their rental income.
The next part of your due diligence is to estimate the fair market value rent by comparing your property’s size, location and condition with other comparable rentals. Your rent should be based on what the market will bear, not on the income you hope to earn. Once you have the numbers in place you can decide if the income and eventual appreciation are worth your investment.
Intuition comes into play when you searching for an appropriate rental property. While there are some basic guidelines to which residences will be appealing to renters, you should also rely on your gut reaction to a property. If you find yourself recoiling from the residence or just instinctively dislike the place, it is likely that potential renters will react the same way.
There are a few important features that DO make a rental appealing:
1. School system: Any property located within a good school district will have an enduring appeal to families.
2. Crime rate: Renters care about living in a safe neighborhood as much as buyers. You should also be concerned about the security of your property.
3. Location: Homes that are convenient to shopping and transportation will naturally be more attractive to potential renters.
4. Neighborhood: Look for an area with well-maintained homes and neatly kept yards without any dismantled cars around. These are signs of a community with pride of ownership.
5. Size: Select a home that is not too large and not too small: no more than four bedrooms, but no fewer than three bedrooms to appeal to a family.
6. Market: Choose a property in an area with an active rental market so that you can easily find renters.
7. Maintenance: Make sure you choose a property that is easy and inexpensive to maintain or improve. A “middle-aged” home could be a perfect choice if it less expensive to purchase but will not require significant repairs.
Relying on your due diligence and intuition to select the right rental property investment is the best way to make a financially sound decision.
Tanya Marchiol, the founder and president of TEAM Investments, has proven herself adept in the real estate and investment arena. Tanya teaches her clients how to generate, grow, and maintain wealth even during economic downturns. She offers tailored guidance based on 12 years of experience and the individual client’s needs. With a presence in all 50 states her ability to connect with and reach a wide range of individuals is evident in her client roster, from professional athletes to young professionals; from Phoenix to Atlanta. For more information, visit http://www.TEAMinvestmentsinc.com. Follow her on twitter @TeamInvestment or Facebook @TeamInvestments