Does that rental property opportunity make sense?

Buying a rental property can be very lucrative and sound
financial vestment. Here’s how to determine whether not buying a rental
property with financing makes sense.

Location, location, location

Location for the property is critical. It is often thought a rental
property is more dollars and cents transaction with less focus on
location. While this is generally true, a rental property in a fantastic
location will always have strong rents, less vacancy, and much better
appreciation over time compared with a property that has better cash
flow in a less desirable location.

Get real about repairs

Generally, it is a good bet when you can buy a rental property where
the rent is greater than the mortgage payment turning your cash flow
positive. It is a good idea to allocate at least 5% of the gross rents
for the inevitable repairs that you’re going to incur as a landlord.
This includes, but it not limited to:

• new roof
• new gutter and or repair
• new paint
• new kitchen
• various repairs

Return on investment

How much cash
will it take to earn x return is critical. Rate of return (ROI) is your
net (after expenses) annual income divided by the capital investment.
For example if your net income is 1k per month and your cash to buy a
rental is $100k (down payment + closing costs). $12k ÷ $100k = 12%
return. Each property will have a different rate of return. What’s the
best return to aim for? That depends on your appetite for risk, cash on
hand and revenue potential the property the property has.

Property type

This one is big and is by far the most important decision you need to
make. For our purposes we are looking at a single-family homes,
condominiums and multi-family properties. Here is the list from best to
worst-multi-family properties almost always pencil better than a
single-family homes. A multi-family home is essentially getting several
single-family homes for one.

Here’s the eye popping part for landlords to hone in on, buying a
rental such as a duplex allows the landlord to have flexibility when
there’s a vacancy. If one unit is vacant the other unit makes up for the
loss and vice versa. The combination of more units means more revenue
driving potential returns higher.

A single-family homes in a great location can be a sound financial
investment. However, if you have a vacancy, you don’t have another unit
to offset loss of rent unless you have a single-family home with a
granny unit. The granny unit can help offset that negative rental impact
on the vacancy. Single-family homes can be solid financial investments
as long as you do your due homework.

Condominiums are last on the list as they are the last to appreciate
and the first to depreciate in economic cycles. Additionally, you’re
sharing units with other owners which makes the income potential is very
limited compared to a single-family home or a multi-family property.
Taking it a step further, the homeowners association payment can be
anywhere between two hundred and four hundred per month. This is a big
chunk of your cash flow that otherwise could be used to plan for upkeep
or pay a property manager.

Consider the following when evaluating whether a rental makes sense for you:

• Is the property in a good location that would generate solid revenue and always be desirable?
• If it’s not in a good location, how much better is my ROI?
• Is this a property that will need minimal or manageable upkeep over the bigger picture?
• Remember older properties need more upkeep.
• How is this benefiting me financially?

As a good rule of thumb make sure you understand all the figures
associated with this high ticket investment. The better handle you have
on the numbers, the better success you will have purchasing a solid
rental property.