For some, buying a property is a stressful event. People hire inadequate companies to help them, and only go through the process of purchasing a property once or twice in their lifetime. The difference between buying your future home and a rental property or an asset, is that you can’t afford to make a mistake, whether that mistake is failing to do your full due diligence before buying, or buying too high, that will impact your cash flow and returns; therefore defeating the purpose of buying an asset to create massive cash flow. Here’s a check list to help you out; 5 things to consider when buying your first rental property:
As the popular saying goes… location location location, but the truth is that it actually depends on the property and the demographic you have your eyes on. If you’re looking for a rental property with 1 bedroom in a neighborhood that’s extremely family oriented, means that your target tenants will be slim pickings, verses if you that same property was half a mile from a college campus.
Maybe that same 1 bedroom property is in an “up and coming” neighborhood with lots of bars. You know that your target renters aren’t going to be a sweet retired couple. Ask yourself what you need, as your tenant, to live there. For a 1 bedroom property, you don’t really have to pay attention to the school district, but things like being walking distance to a supermarket or dog park can be a huge plus in attracting your dream renter.
2. Type of Property
Again, depending on your budget and what you’re looking for, you can afford to buy a property with a certain number of rooms or of square feet. That’s great. But again, you have to think about your target renter again. A four bedroom house with a very small living room? Your target renter would probably have two plus kids, so a small living room will be a deal breaker for that prospective tenant. But that same property could be the perfect fit for 4 young professionals or college students who’d like to be roommates. And if you plan on having that demographic (roommate situations), you have to consider things like if there are enough bathrooms.
Remember that just because the bank is willing to lend you a huge amount for a loan, doesn’t mean you should borrow everything they offer. Think about the worst case scenario, like the property staying empty for a year. Ask yourself questions like can you cover the mortgage? Will you have to agree on a short sale $20,000 under what you paid for? The point of buying an asset is to give you financial freedom, not ruin you, your credit score, and make your nest egg vanish into thin air. Be careful, be smart, and don’t get ahead of yourself.
4. The Works and Fixes
You need to consider how much work on the property needs to be done before you can rent it out. You need to calculate and budget the cost, as well as the timeline. Why? Because during that time you will be spending more money and have no rental income coming in for that property.
If the fixes include a simple paint job or carpet cleaning, you could offer your tenants free rent for the first month if they take care of those fixes themselves. But if more serious rehabs are needed, you need to decide if you’ll make it a DIY project, or hire someone; and if you do decide to hire a contractor, clearly define the terms for both the budget and timeline. The last thing you want is a delay or huge unexpected cost.
Be cautious, realtors will always tell you that you can rent your place for $1,000,000 more than market rent, so you give them the business. So take their opinion with a grain of salt, and then look at the facts: a listing gone is a rented place. So look at what the listed rent price was. Maybe you’ll never know exactly what the rent amount is, but the listed price for that property was fair enough to attract the tenant now living there, right?
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