There are numerous ways to make money in real estate. With the real estate rental market still hot, many investors are opting to rent and see what the market does down the road. Instead of buying and fixing, with the intent to flip, you can hang onto the property and rent it for the foreseeable future. However, buying with the intent of holding as opposed to flipping can present different challenges. There are profits to be made with either strategy, but with any rental property, there are some items that cannot be ignored.
Regardless if you are buying to flip, rent or live in, the most important feature of any property is the location. You can have a great property, but if it is in a bad area the demand will be diminished. You need to know everything about the surrounding area and the local market. This goes well beyond knowing what the numbers are and comparable rents. You need to know if there are any local changes on the horizon that could impact your bottom line. Anything from taxes to school closings will impact your numbers, and ultimately your demand. Before you buy, you need to know what the zoning is like in your area and what taxes are scheduled to do in the future. Employment data, new housing starts and foreclosure numbers will also have a direct impact on just how profitable the property will be. If you do not know everything about the area and market, you are opening yourself up for trouble if anything changes.
With a rehab, your sales price is directly correlated to the condition of the property. If you opt to do minimal work, you can expect a minimal return. If you throw money at the property and update everything, your return can be much greater – if you do the right work. On a property that you are looking to hold, you can do as much or as little work as you want. Rental property updates may not have as much of an impact on demand if you were selling to an end buyer. Before you buy any property, you need to know exactly what you are walking into. Even if you do a basic amount of work just to get a tenant in, you should know what is on tap down the road. You have to prepare for this work to be done eventually. If you do not have reserves ready for when the furnace goes or the dishwasher stops working, you will be left scrambling for answers. There is nothing wrong with trying to get the most out of the electricals and appliances, but as soon as they go, you need to be ready to act. If you don’t, your tenants will sour on you and the property.
It is critical, with any rental property, that you look at all the numbers. It is easy to plug in figures to make the deal look more attractive than it is, but all you are doing is hurting yourself. It is not enough to take any numbers on the listing at their word. You need to put the work in and find out exactly what the up to date figures are. In addition to the updated tax amounts and insurance numbers, you need to budget for reserves, vacancy factors, seasonal costs, miscellaneous bills and everything else that can possibly be a property expense. In many cases; if you plug in all the accurate numbers, a property that appeared attractive in reality may not be the case. It is better to know this before you buy than to have to deal with it after your first tenant. Knowing the numbers is not enough. You need to know the right numbers.
There are many seemingly small items that mean a lot to renters. Little things, like the type of heat in a property or how well lit a unit is, can make all the difference. Some of these items can be easy fixes, but some of them can be difficult and expensive decisions. While you never know what your position will be on a property in five years, you need to have some long term strategy in mind before you buy. You are going to have to spend some money on the property unless it is in turkey condition before you buy. You may not see the return for years, but if you intend on keeping the property for ten or more years, it may be best to do the work and not have to worry about it again. Every inch of the property needs to be looked at and evaluated before you make a decision. Little things mean a lot to renters.
Owning a rental property has many great short and long term rewards. Some of the most successful investors have attained great wealth largely due to their long term rental portfolio. Buying with the intent to rent, as opposed to a flip, is a different mentality and comes with a different set of challenges. You need to know everything about the property, the area and all of the numbers involved. The more you know before you buy, the better your rental decisions will be.
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