Want to be an investor?

Starting Your Search

Your investing range will be limited by whether you intend to actively manage the property or hire someone else to manage it. If you intend to actively manage, you should not get a property that’s too far away from where you live unless you can put together a team of local individuals who can help you manage it. If you are going to get a management company to look after it for you, your proximity to the property will be less of an issue. 10% of the total annual lease is what a property management company would charge and should be added to your cost analysis when considering price. Some other factors to consider when buying an investment property:

1. Neighborhoods

The quality of the neighborhood in which you buy will influence both the types of tenants you attract and how often you face vacancies. For example, if you buy in a neighborhood near a university, the chances are that your pool of potential tenants will be mainly made up of students and that you will face vacancies on a fairly regular basis (during summer, when students tend to return back home) unless you can rent your property to faculty where you might have higher chances of long term tenancy.

2. Property Taxes

You want to be aware of how much you will be losing to taxes. High property taxes may not always be a bad thing if the neighborhood is an excellent place for long-term tenants, but the two do not necessarily go hand in hand. The town’s assessment office will have all the tax information on file or a well-informed Realtor and/or loan officer can help you determine taxes. Assessments vary for each neighborhood so it is something you will want to consider before making an offer.

3. Schools

When you have found a good property near a school, you will want to check the quality of the school as this can affect the value of your investment. If the school has a poor reputation, prices will reflect your property’s value poorly. Although you will be mostly concerned about the monthly cash flow, the overall value of your rental property comes in to play when you eventually sell it and retire someday. Also, keep in mind that neighborhoods with “up and coming school” is a good investment and can lead to quality tenants.

4. Crime

No one wants to live next door to a hot spot for criminal activity. Check out with Trulia.com to see neighborhood crime reports or check with the city website to get statistics.

5. Jobs

Locations with growing employment opportunities tend to attract more people – meaning more tenants. To find out how a particular area rates, go directly to the U.S Census Bureau and check out the stats. Keep informed about new companies that might be moving into the area. Remember that we are also now in 2013 where half of our workforce works from home. Santa Cruz is home to many who have an office in the South Bay but prefer to live in the scenic and lovely coastal town.

6. Building Permits and Future Development

The municipal planning department will have information on all the new development that is coming or has been zoned into the area. If there are many new condos, business parks or malls going up in your area, it is probably a good growth area. However, watch out for new developments that could hurt the price surrounding and cause competition for your rental.

7. Rents

Rent will be the bread and butter for your rental property, so you need to know what the average rent in the area is. If charging the average rent is not going to be enough to cover your mortgage payment, taxes and other expenses, then you have to keep looking.

8. Natural Disasters

Insurance is another expense that you will have to subtract from your returns, so it is good to know just how much you will need to carry. If an area is prone to earthquakes or flooding, the extra insurance can add up and eat away at your rental income.

9. Rent Control

Check to see if there is rent control in the area you are interested in and if so, what are the rules. How much can rents be raised and what are the rules you will have to obey. All of this needs to factored into your cost analysis.

The Physical Property

In general, the best investment property for beginners is a residential, single-family dwelling or a condominium. Condos are low maintenance because the condo association is there to help with many of the external repairs, leaving you to worry about the interior. Because condos are not truly independent living units, however, they tend to garner lower rents and appreciate more slowly than single-family homes. Make sure you do your due diligence and check the reserves and the HOA guidelines. Single family homes will appreciate faster and may attract longer-term renters but they do require more maintenance so you have to decide what is the best purchase for you. When you have the neighborhood narrowed down, look for a property that has appreciation potential and a good projected cash flow. As far as cash flow, you are going to have to make an informed guess. Take the average rent for the neighborhood and subtract your expected monthly mortgage payment, property taxes (divided by 12 months), insurance costs (also divided by 12) and a generous allowance for maintenance and repairs. Don’t lie to yourself and underestimate the cost of maintenance and repairs or you will pay for it once the deal is done. If all these figures come out even make an offer!

What are you waiting for?

Every state has good cities, every city has good neighborhoods and every neighborhood has good properties, but it takes a lot of footwork and research to line up all three. When you do find your ideal rental property, keep your expectations realistic and make sure that your own finances are in a healthy enough state that you can wait for the property to start producing cash flow rather than needing it desperately. Real estate investing doesn’t start with buying a rental property – it begins with creating the financial situation where you can buy a rental property. Team up with a knowledgeable Realtor like myself who can help you find the ideal income property.