Picking a good cash flow rental property is different from picking a good home for yourself. You might want certain features in your own home that aren’t required in a good rental unit. Your overall goal in purchasing a rental property is to produce income right now, and possibly some equity in the long run, so you need to focus on properties that will allow you to achieve that goal. You also want to minimize your risks, both financially and in terms of liability. In order to meet all these requirements, take the time to investigate thoroughly and choose carefully.
If you’ve heard or read that a particular city is a good place to buy cash flow rental properties, you should be aware that in most areas the truth of this blanket statement will vary from neighborhood to neighborhood. Do your homework and make sure you’re looking at the best locations for rentals.
Learn about the local economy. Is it growing or shrinking? Are home values rising or falling? Even if your primary purpose in buying a rental property is cash flow, you don’t want an investment that will leave you under water. Find out about vacancy rates, which will also be affected by the local economy. When jobs disappear, so do tenants.
The right location will also offer a larger pool of good tenants. For instance, a property near a college or university may be easy to rent, but students are notorious for trashing rentals. On the other hand, a stable neighborhood with good schools is more likely to attract a family who may treat the property as their own home. See why many investors are choosing Jacksonville, FL.
The condition of a rental property affects its profitability in a number of ways. Get a professional home inspection before making your final commitment on a property. Very few homes come through an inspection with a perfect rating. What you need to find out are all the details you can about the property’s actual condition. Then you need to learn about the potential costs you may incur for repairs or rehab before you can even list it as available.
If the property is not already a rental property, you may need to do some upgrades to bring it up to local building codes and to comply with any applicable landlord and tenant laws. Get professional estimates for any work you are considering, so you know exactly how much these repairs will cost.
Run the Numbers for Cash Flow
Inexperienced rental property buyers may have a tendency to overlook some of the important numbers involved in being a landlord. If you simply look at your mortgage payment and compare it to a rental figure you pulled out of the air, in reality you may be surprised at how little cash you have left over every month. Running the numbers is essential in picking the right cash flow rental property. Try our cash flow calculator to get an estimate of what your returns could be.
Begin by checking out the local rental rates. If the property currently has tenants, find out what they are paying. Also check with property management companies and real estate agents who are familiar with that neighborhood. Focus on what tenants are actually paying, not what owners of vacant properties are asking.
Once you have determined a realistic rental rate, it’s time to add up your expenses. These will include:
- Property management fees
- HOA fees, if applicable. You may have to hunt these down. Ask your real estate agent to help you out. Many homeowners’ associations list fees on an annual or quarterly basis, so be sure to break it down to a monthly rate.
You’ll also need to account for vacancy expenses, such as advertising for new tenants, cleaning up after the old tenants, and paying utilities while the property is vacant. In addition, you’ll need to be prepared to cover maintenance and repair costs whether the property is tenanted or not.
When you subtract these expenses from the amount of rent you’ll be collecting, the amount remaining is your profit. Does it meet your goals? If not, you may need to look for another property, revise your goals, or both.
One popular way investors are getting into real estate investing is through turn key rental properties as everything is managed by an experienced, professional team. A good turn key investment company can save a lot of time while providing great returns for their investors. JWB has over 10 years experience providing investors with a truly turn key experience, so they can earn passive income and strengthen their investment portfolio. Talk to us to learn how we can help you create a sound investment strategy by investing in turnkey rental properties.