Congratulations on your decision to purchase a rental property. Now comes the hard part: finding the perfect property that will generate sufficient income, while requiring a minimum of upkeep and maintenance.
One way to find the right property is to have a due diligence list. Such a list should keep you on track when shopping for a property, reminding you what to look for — and what to stay away from.
Here are a few things to consider as you search for an appropriate property.
1. Is it in good condition? Although you may find a diamond in the rough, if the price of a property seems too good to be true, it probably is. Factor in the cost of necessary repairs and renovations before you make a decision. In many cases, it's cheaper to purchase a better house than it is to fix up an existing mess.
2. Is it in a good location? Location is one of the primary concerns for any property. If it is located on a busy street, it will be harder to attract tenants who prefer peace and quiet. Is the property located in a business district or near loud factories? This can greatly reduce its overall appeal, no matter how you maintain it. Conversely, a property near a park and/or good schools will likely attract families.
3. Has it been used as a rental property in the past? If the property has been a rental in the past and has garnered a bad reputation, it can be tough to dispel. It takes time to change the opinions of local residents. Determine whether you have the time and marketing skills to change the property's reputation.
4. Are there tenants on the property? You will need to honor any current lease agreements with your exisitng tenants. You won't be allowed to raise their rent until their leases expire, and you may be subject to state laws dictating how much you can increase their rent. State laws will also typically limit how much you can raise the rent for unoccupied property.
5. Can you handle the needs of the property? If you are unable to repair a property or maintain it, you'll probably need to hire a professional, such as a property manager. This will cut into your profits. However, it will be beneficial in that you won't always have to be present to handle any problems that arise. New landlords should be very careful about buying property they can't oversee themselves. Even if you do hire a property manager, you should be able to visit the property on a regular basis.
6. What is the neighborhood like? Even if the property you're considering is in great condition, take a look at the surrounding dwellings. Are they well maintained? Are there any problems with unsavory characters or other neighborhood residents? This can greatly affect your ability to attract new tenants, and may result in a high turnover rate if the area has a bad reputation. You may also need to provide security for a property, if the neighborhood has a history of problems. Research the neighborhood's crime statistics as well as the turnover rate for other properties.
7. Is the price right? If you're going to rely on your rental income to provide mortgage and tax payments for a property, make sure you'll be able to make these payments, even if the property isn't at full occupancy. It may take some time to fill the property, leaving you with a shortfall. Also take into account other expenses, such as repairs and general maintenance. If the numbers don't add up, keep looking.