19 Sep What to Look for When You Consider a Potential Rental Property
Picture this. You find an incredible property online and take a virtual tour. The floors are beautiful, the kitchen looks new, and the bedrooms are spacious. You’re amazed at the price and think this is a steal of a deal!
What would be your next step?
I hope you said “Set up an appointment to visit the property in person.” Nothing takes the place of going to the property and physically looking.
One time, my wife Becky and I looked at a beautiful property online, but when we actually drove to the home and looked around, there was a huge crack winding along the wall. I saw that ginormous crack, turned around, and never went back.
Always set up an in-person tour of a possible rental property.
Maybe you’re asking, “When I visit a property in person, how do I know if it’s a great buy?”
That is a great question.
Think about these four considerations before you purchase a potential rental property.
Condition of the Property
It’s important to look at the condition of the property. How much work will the property need? What repairs must be made before the property is move-in ready?
My favorite kind of properties are those that simply need lipstick. In other words, I like to purchase properties that need a quick brush-up such as paint and carpet.
Over time, as you begin investing and developing your real estate business, you will make connections with contractors and laborers. This makes the lipstick application process – a paint and carpet job – quick and simple. All real estate investors need a solid contracting team around them.
So, as you walk around the property, ask yourself how much work the home needs. Would it be a quick lipstick application? Or would it be a more in-depth renovation project?
Then, ask if you have the contractors and laborers available to do the work needed.
Situation of the Seller
It is wise to buy low and sell high. Oftentimes the situation of the seller allows for this.
While it is never the goal to take advantage of others, there are situations where a home will sell low simply because the bank wants to get rid of the property quickly. Foreclosures and short sales are the perfect example.
Other examples of this kind of situation are investors looking to get out of a property, couples going through a divorce, people being transferred because of a job relocation, and more. Again, it’s not the goal to take advantage. It is, however, wise to find motivated sellers who want to get rid of a property quickly.
This helps the seller and you – the buyer!
Median Income of the Area
The median income of an area signifies where most people are financially. A great example of this is to think about average income versus median income.
Say Bill Gates moved to downtown Denver. The average income of that area in Denver would immediately rise. However, the median income would remain basically the same. That is because most people in the area would be middle class, and only one individual – Bill Gates – would be of a significantly different class.
To find the median report of an area, search for the median income and the median sales price of a home in whatever area the potential home is located. Divide the income by the price. This number is your ratio.
It is my recommendation to only buy a potential rental home that sells for no more than 2-4 times the median income.
The only exception to this rule is for vacation homes.
It seems obvious, but unfortunately demographics are often forgotten when considering a real estate purchase. There are three demographic signs to consider before purchasing.
First, it is important to take note that job growth is occurring, because this means that the overall economy of an area is healthy.
Second, it’s also a good sign when the population is increasing. If the population is steadily increasing, you will not have a hard time renting your property. However, if the population has seen decline in recent years, it may be more difficult to regularly rent your new property and make a profit.
Third, take note of the size of the metro area. Are there one million or more in population? If so, there will be lots of property movement. This is a good thing for real estate investors! As you grow your real estate business, it will not be necessary to limit yourself to large metro areas alone, however they are a great place to start.
Remember the story about the huge crack in the wall at the beginning of this post? There can be cracks of all kinds.
There are physical cracks that cause massive repair costs. Demographic cracks could influence the rent-a-bility of a property. And median income cracks may cause you to pay more for a property than the home is truly worth.
As you visit potential rental properties, consider all of the possible cracks – and even the ones not listed in this post. Consider the tax benefits, the expected cash flow, the housing demand of the area, and more.
Never settle for a virtual tour when you have the ability to go to the physical property. And never settle for second-hand information when you have the ability to research your own information.
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