As investment properties go, there are many choices out there, many of which are good. However, one of the best investments would be single-family rental homes. Single-family rentals have record numbers of renters on the market, making it an investment with high demand. There are also other advantages you can get. These benefits include long-term residents and the ability to appreciate over time. There are, however, some challenging areas when you’re planning to own rental properties. The most challenging of all is probably finding a great bargain in an expanding market. But don’t go rushing into a deal even though the deal seems pretty sweet, and especially if the seller is pressuring you to make a decision right away. Before buying that rental property in Sykesville, it’s important to ask yourself six key questions.
1. Why is the home listed at the current price?
A good deal on an investment property often starts by finding properties listed below market value. However, although a property may be listed at a really affordable price, it just might be hiding the real reason why it’s such a bargain. It’s important to know the reason behind the pricing. Carefully check the property to makes sure it doesn’t have any hidden damage or needs major repairs. Unless it’s your plan from the beginning to invest a large sum of money into fixing it up, you’ll want to avoid a property like this. Anything spent making the property habitable must be factored into your rental margin, so why the property is underpriced matters.
2. What is the state of the local real estate market?
Regardless of where you’re planning to purchase a rental property, do your due diligence and research on the neighborhood and local market first. Some of the things you need to know are: how many rentals are nearby, what is the rental rate average for properties like your prospective one, and what the trend is for those rates— whether the rates have gone up or down recently. Crime rates, nearby amenities, access to public transportation, the local job market, and more are also important aspects of a rental’s location. The ideal investments are in locations that have a moderate number of single-family rental homes with relatively low market values but comparatively high rents.
3. What is your expected rate of return?
Location and price are important, but you shouldn’t neglect to calculate a potential rental property’s rate of return before making an offer. The rate of return, also known as the capitalization rate, depends on the location, but it often falls between 4% and 10%.
To determine the capitalization rate for a potential investment property, calculate your net operating income (rent minus expenses) and divide it by the home’s sale price. See to it that you include the other expenses connected with the sale or with the ownership of the property. These expenses include property taxes (which you can get from the county assessor’s office), Association fees, and any extra insurance required if the home is in an area prone to natural disasters.
The smart move would be to make sure total expenses are about 50% of the gross rents – this is known as the 50% rule. If the property you have your sights on doesn’t offer a good return, give it a hard pass. There are a lot of other properties out there.
4. Are there ways to quickly increase the value of the property?
In a competitive real estate market, bargain properties are sometimes not very easy to find. This is where some creativity and vision can help. Others may have passed on some quality rental homes, but that deal could still be very good for real estate investors. To achieve that, all you have to do is add value to a property, and there are several ways to do that.
As a case in point, suppose the house has only one bathroom, you can add a second bathroom to increase its value. You can also upgrade the interior with modern flooring or new appliances. Some homes have dens, sunrooms, carports, or other areas. These can be converted to increase the property’s total square footage, and it wouldn’t have to cost a lot or take too much time. All this work would be adding value to your rental property. This way, you’ll be generating the positive cash flow you need.
5. Does the property fit into my niche or area of expertise?
One of the biggest novice mistakes is getting a property in Sykesville just because there seems to be a bargain. New investors also unnecessarily rush themselves by deciding on a certain deadline for their next purchase. But there could be some issues the bargain property you get is not part of your field of expertise or if you are compelled to ignore clear warning signs to make a purchase.
Ideally, you should develop a deep understanding of one niche or segment of the market so that when a great deal on an investment property comes up, you can make the proper call. You can see for yourself whether or not it’s too good to be true. Likewise, patience is a must so you can wait for the right deal to come along. This is an important aspect of investing in rental properties.
There will be seasons where it seems everyone is buying now, but that doesn’t mean you should follow the trend. Make sure that any prospective property you have is in line with your specialty area and helps you achieve your goals. Keeping this in mind will keep you away from most of the common investing mistakes.
6. Who will manage the property?
A great rental property is also one that appreciates over time. However, to make sure the property continues to grow in value, you need to have your property managed by someone trustworthy and trained for this specific job. If you have what it takes to manage the property yourself, then the next thing to check is your time availability. This jobs requires you to handle midnight emergencies or repairs.
If you don’t plan to do it yourself, or if you live far from your rental property, you’ll need a property management company to do the work for you— one that understands your investment goals. Professional property management companies like Real Property Management have grown to become a reliable, nationwide resource for rental property owners like you.
Don’t rush to purchase that rental property in Sykesville. Instead, make sure that you have the best and most recent information available. Real Property Management Essentials offers a free rental property assessment that can give you the data you need to reach the best decision for you. Take advantage of this offer by contacting us online or calling 410-832-3138.
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