Purchasing a rental property can be a great way to create a supplemental source of income. It is an investment and with all investments there’s a lot to understand and do to get it right. While we won’t provide any tips on financing or legal considerations of owning rental properties we will provide a few tips on getting started after you’ve gotten your independent advice on whether a rental property is right for you.
1. Choose the tenant before purchasing the property
Too many landlords start by choosing a property and consider who’d rent it later on. If you’re not in a hurry to rent your property there’s nothing wrong with this approach. However if your goal is to make sure the investment pays for itself and provide you with an additional income then it’s better to start out knowing who your ideal tenant is ‘before’ you go ahead with an actual purchase. To identify your perfect tenant study the demographic of the population you’d like your tenant to come from and is there an ample supple of people who belong to it. You may decided you want a young professional couple whoever there are other groups that may be worth considering too. Who is your prospective tenant, and which demographic do they belong to?
The demographic of your tenant may be…
- Newly wed or single couples that plan to eventually buy their own home
- College students attending respectable universities
- Recent graduates with too much student loan debt to purchase their own home
- Respectable, low-income tenants that qualify for Section 8 housing with reasonable cash flows
When you understand who can rent your property in your chosen location, finding the right property will be a lot easier. You’ll be in control of the process from the get go if you want a law student or two then purchase a rental property near a major law school, or if you prefer cheaper and possibly run-down properties that qualify for Section 8 housing assistance then focus your property search on properties that fit into that category.
The underlining rule of thumb for getting your property rented quick-smart is to know who will rent your property before you buy it.
2. Look for property in an area with a decent supply of your type of tenants
While some communities have worked hard to cater to specific demographics e.g. students or millennials, to grow their population, so far it’s a strategy that hasn’t shown a lot of promise for many towns still remain unpopular. For example there are cities in New Hampshire, Maine and other smaller States with fewer than 1,000 people. It takes a lot of investment to change perception and build a healthy city brand to attract businesses and with it the people. Therefore finding tenants in most of these areas will be a lot harder so it pays to do your research and identify target areas where you can purchase property in populous towns with the type of tenant you want to attract for your rental property. Look for towns with the prerequisite infrastructure and services that support urban living e.g. transport links, education providers, shopping centers etc and you’ll your type of tenant.
3. Don’t buy “Fixer Uppers” unless you are willing to put in the work
Lots of real estate investing “gurus” advise people to invest in fixer uppers. They claim that you can buy a distressed property, make a few repairs to increase the property value and sell it for at least twice what you paid.
This approach sometimes works when your strategy is to flip a house – i.e buy, renovate and sell. However, if you intend to buy a rental property to hold for the income, a do up property may not be the best bet unless you’ve got the capital to bring the property up to the standard your desired tenant expects. You won’t be able to rent the home out while you are making the necessary repairs so consider your renovation budget carefully so it includes the down time your property is offline.
Do a lot of research at the outset of your property search. Go to a lot of open homes. There are reliable real estate companies like Sarasota real estate who will provide you with tips on what to look for in a rental property and where the best locations are for your desired tenant and what homes are worth viewing. You will also be introduced to properties you may not have considered a good fit. Remember real estate agents are looking at property every day.
4. Location, location, location
We have mentioned that knowing the type of tenant you want in your rental property is starting point and that you need to choose an area that attracts these tenants so now you need to consider the location. You have probably heard the phrase “location, location, location.” What this means is that you need to buy a property in an area that people will want to live in and therefore the property in the location is in demand.
Unfortunately, real estate markets can change quickly as areas lose business. Landlords in Detroit can attest to this. I have lived in a couple communities where over half the population worked for a single employer. When employers are forced to close down for one reason or another, the residents move to other cities to find work. As you can imagine, vacancy rates soar, which in turn hurt landlords if their property remain empty. Selling the rental property is not often the answer either as the property market has taken hit and values have dropped. So while it’s not always possible to predict the future wellbeing of a town or city you can do some research into it’s current position and performance.