3 Things to Consider When Buying a Rental Property

Although it may be a daunting task, owning a rental property can be a rewarding investment. Rental properties have the ability to put extra cash in your pocket – so long as you do your homework.

We’ve put together a shortlist of what to consider when looking at and buying rental property.

1. Singles or couples

What should you be looking for in terms of the physical property?

Generally, single-family homes are your best bets. First, people living in single-family homes are either couples or families and these tend to be longer term rentals. Couples/Families even tend to pay rent more regularly (without hassle) than single people and are generally more financially stable if it is a dual-income household.

Looking for a property that has appreciation value is important as well. You’re looking for something that, with a just a little bit of handy work, or even some more sophisticated renovations, the property could attract renters willing to pay higher rents.

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2. Location, location, location

Ah, the classic real estate adage; the neighborhood itself will dictate how much you can charge for rent but there are other factors also. You’ll have to look at how expensive property taxes are. You’ll also need to consider that proximity to good schools can be a major factor. If you’re near a good elementary or high school the value of the property will go up. If you’re near a university, on the other hand, you’ll most likely be dealing with students. University students mean more vacancy, less money and potentially more headaches.

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Source: Sage Stossel

Neighbourhoodsclose to dense job markets are in high demand. A lot of people want to live close to where they work. You’ll also want to look at what the future has in store for the community you’re looking to buy in. Are there projects in development that could help attract people to the neighborhood? Conversely, you don’t necessarily want more condos being built in your area because that could drive your price down. An area with parks, public transport, and a ton of restaurants is going to be easier to sell to a potential renter.

One more thing. This may sound obvious but your proximity to the rental property is important too. If you intend to manage the property yourself, it’s actually in your best interests to find a place near where you actually live. Travel times can sap your energy and you want to be able to be a hop, skip and a jump away from your tenants in case any issues arise. You can always hire a property management company but that adds a layer of middle management that eats into your bottom line.

3. The one percent rule

The One Percent rule states that the gross monthly rent should be at least one percent of a property’s final price. If you buy a property for $180,000 and then invest another $20,000 in renovations, that’s a final price of $200,000. 1% of that is $2,000. Ideally, that’s how much you want to collect in rent every month.

This rule can be used as a guide to help with buying decisions because if a property meets the one percent rule it is a good bet that the monthly rent earned from the property will be equal to or greater than the mortgage payment.

If you do that it means the property is paying for itself. Actually finding viable properties that meet the 1% rule will be tough but it’s a good way to force oneself to hold out for real quality.

There will be sleepless nights and stress filled days as the owner of a rental property. It comes with the territory. Fortunately, the big picture is a rosier: if you take the right steps, owning a rental property can be a huge boon to your bank account and savings.

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6 responses to “3 Things to Consider When Buying a Rental Property”

  1. prosper says:

    Nice Tips .Thanks for the post

  2. prosper says:

    Nice Tips .Thanks for the post

  3. […] 3 Things to Consider When Buying a Rental Property — Use the One… […]

  4. […] 3 Things to Consider When Buying a Rental Property — Use the One Percent Rule to figure out how much you need to charge in monthly rent in order to over the mortgage payment. [Wall Street Survivor] […]

  5. Rental properties are great investments. These are some great tips to help people get started. I agree that location might be the most important aspect to consider when choosing your rental properties. It might even be more important than the tenant. Thanks for sharing!

  6. That one percent rule is a nice, back-of-the-envelope ballpark calculation, but you may want to do a little better than breakeven in terms of rent versus purchase price/monthly carry cost. In addition to covering the principal, interest, taxes and insurance for the property, you’ll need to charge enough to accumulate at least some additional funds for maintenance and repair of the property over time, and hopefully even build a up little reserve to help cover these costs during times the property is vacant… and with a little luck you may also be able to generate a little positive cash flow from your investment, a goal of many residential property investors.