As more people are looking to diversify their investment portfolio, they are discovering that real estate investment is not reserved for professional tycoons anymore.
It turns out that real estate is a good investment for beginners.
Purchasing rental properties can be an exciting and rewarding way to boost your investment portfolio and potentially create a passive stream of income.
There are some basic things to consider when before searching for the perfect rental property.
Finding a Profitable Property
It's essential to imagine the type of tenant you want to attract and consider these factors:
- Job Market
The neighborhood you purchase your rental property in will determine the type of tenants you will attract.
If you purchase a property near a university or in a tourist area, you will likely attract students and young adults, which may impact your vacancy rate each year.
If your goal is to attract married adults and families, you will have to focus your search on family-friendly neighborhoods.
If you are going to be renting to couples or families, favorable ratings for the local schools are essential.
Being in a good school district attracts high-value renters who are able and willing to pay more each month.
Aside from the impact, it can have on your monthly cash flow, picking a neighborhood with poor school performance can leave you stuck if you ever decide to sell.
People are not lining up to get into a neighborhood with a high crime rate.
Check Google Street View. Are the houses neglected and dilapidated?
If the surrounding area is heavy with businesses like bail bond agents, liquor stores, and check cashing places, it might signify that it's not the safest area.
You can also check with the local library or police precinct to get accurate crime statistics for the neighborhood you are interested in purchasing your property in.
While crimes like shoplifting might not have a high impact on property value, crimes such as burglary and muggings can make your rental property tough to fill.
Check the US Bureau of Labor Statistics (BLS) to find out the job rates in the area.
Locations with growing employment opportunities are going to attract more tenants.
If the employment rate is less than 50% in the area, you should consider a different location. 70% employment rate is deemed to be high.
Take a neighborhood tour, check out the town's social media or visit the city hall for promotional literature.
Local parks, restaurants, gyms, movie theatres, shopping centers, and public transportation are all perks that could attract potential tenants.
If you plan on managing your property on your own, it's a good idea to find a neighborhood within 30 miles of your own home. Being a landlord requires you to be on call 24 hours per day.
Traveling an hour to unclog a sink at midnight might make you rethink your path as a real estate investor.
If you plan to find a professional to help manage your investment property, you are not limited by distance.
The One Percent Rule
The one-percent rule is a real estate investing strategy used when evaluating if a property can generate a positive cash flow.
If you are new to the world of property investment, you may think this requires a complicated equation and advice from a professional, but the formula couldn't be more straightforward.
1% of Total Investment < Monthly Rent
Your property should have the potential to rent for at least 1% of your total investment. If you are looking at a $100,000 property, it should rent for at least $1,000 per month.
This simple rule of thumb can quickly determine if the property deserves a closer look.
Remember that the rent should cover 1% of your total investment, not just the mortgage. If you are looking at a $100,000 property that needs $50,000 worth of work before it is rentable, you would need to be able to charge at least $1,500 per month.
Lenders have stricter approval requirements for mortgage loans on rental properties. Since mortgage insurance isn't available for investment properties, they typically require a larger down payment as well.
You should plan on budgeting 20-30% as your required down payment to get the best financing terms.
Some first-time property investors will seek a personal loan for their rental property's down payment and closing costs.
If you find the perfect property, you don't want your offer to be held up because you aren't prepared with the necessary funds to make an offer.
Securing your down payment and obtaining pre-approval from your bank before you start looking will save you time once you find your property.