Due to popular demand, guest posts have returned back to First Rental Property. It has been a while since our last guest post, however, the wait has been well worth it.
Today I have for you a very well written article compliments of Phil Wiper of Family Lending.
In today’s article, Phil discusses 5 important factors that every new real estate investor needs to consider when they are buying their first rental property.
Enjoy the article, and please leave your comments in the comments section below.
Also, don’t forget to check out the article I wrote for The Family Lending Blog titled, Here Is A Method That Is Helping Home Owners Save Thousands On Their Mortgage.
Best Regards,
Neil Uttamsingh
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5 Items to Consider When Purchasing Rental Property
If you are ready to purchase your first rental property or still sitting on the fence wondering if you are making the right decision, I am here to tell you that the decision to purchase your first rental property is never an easy one but once you have done so, you will never turn back.
You’re probably wondering why should you listen to me, but I have bought and sold over 10 rentals in the last couple of years. I am here to say that if I just looked out for these 5 items that I am going to share with you, I would have been a much happier camper. Instead, I had to learn the hard way, one building, and one tenant at a time.
These 5 important items include:
1. What is the expected cash flow from the rental property?
• First lets say that you are looking at a duplex for $200,000
• Through your market research and the information you obtained from your appraiser, you have determined that the market rents for your area are X.
• Next you should have been given a pro-forma of expense for the property which includes the mortgage, insurance estimate, property tax amount, utilities (if the tenant is not paying them) and the property management costs.
• Your objective is to have this property putting POSITIVE CASH FLOW in your pocket from day ONE.
• Not all areas of the city can support the rent required to cover the mortgage and the expenses. My suggestion, do not purchase in the areas where you know that this will not work. You are looking for areas where you can have positive cash flow, after all you are in this to make money right?
2. Pick a neighborhood with low vacancy rates in comparison to the rest of the city.
• From my personal experience, it is best if you look to purchase a rental home in a healthier neighborhood. There are a couple of reasons for this; one is that you will be looking at a higher rental payment and two, the vacancy rates tend to be lower.
3. Take your time in picking a qualified tenant.
– Taking your time to select the right tenant will help you reduce risks in the future. A better qualified tenant also means lower costs and problems down the road for you, the owner.
4. For your 1st rental property or two, the home that you purchase should be in move-in condition.
• Since you will be busy making sure the home is fully rented out when you take over, the best thing that you can do is buy a unit that is move-in ready. Now I am not including the minor jobs including making cosmetic changes such as cleaning or maybe painting a room or two but the changes should not include major repairs.
5. Buy low and sell HIGH – always be on the look out for homes that are priced under the current market value.
• Low sale price does not mean low value or low rents
• How do you find these deals? Ask. Ask everyone you know. Take the time to get to know the area you are looking for.
• Be on the look out for pre-foreclosures, foreclosures, and homes that have been on the market for a year.
Now what do you do? Go buy a rental unit of course. Still need help calculating what you can afford? Try our handy mortgage calculator canada which can help you calculate payment options, schedule of payments and much more. Also, follow FamilyLending.ca on Facebook and Twitter!
Check out the folks at Family Lending today!
I would have to agree with the comment that for a first time investor their first two or three investments should be ‘move in’ properties. The first steps to purchasing an investment property can be quite stressful without having to worry about the extra stress of analyzing a rehab and then costing it well to make money.
Unless an investor is doing that as they method of income e.g. a builder, then getting into the rehabbing of properties is something to be left for a later stage.
Working through the steps to purchasing a profitable buy should be challenging enough for the firstime investor.