As investment properties go, there are many options you can choose from, but one of the best would be the single-family rental home. There is a high demand for single-family rentals since this investment has been churning out record numbers of renters on the market. There are also other advantages you can get. These benefits include long-term residents and the ability to appreciate over time. But there are also difficult parts about owning rental properties, and probably the most difficult part would be 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 Spanish Springs, 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. But there may be a reason why it’s listed at that price, and knowing this is more important than scoring a good bargain. Check to make sure the property doesn’t have any hidden damages or needs major repairs. Unless it’s part of your plan 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 look into are: how many houses nearby are rentals, what the average rental rate is for properties similar to the one you want to purchase, and 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. Ideal locations usually offer a moderate number of single-family rental homes that have quite low market values but comparatively high rents.
3. What is your expected rate of return?
On top of assessing the location and price, you should also calculate a potential rental property’s rate of return before making an offer. The rate of return, or capitalization rate, may have variations depending on the area, but it commonly 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.
It would be a good idea to keep total expenses to 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 plenty of other opportunities out there— properties with better deals.
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 do that you just need to add value to a property.
For example, let’s say a house has only one bathroom. You can add a second one to up the value. Upgrading the interior would also work, replacing it with modern flooring or new appliances. There are houses with dens, sunrooms, carports, or other areas. These areas can be converted to increase the property’s total square footage, and the work can be done fast and inexpensively. What this does is add value to a rental property. This additional value can bring in 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 Spanish Springs 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 problems that would arise if you purchase a bargain property that’s outside of your expertise or if you feel compelled to buy despite seeing clear warning signs.
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. In the same way, having patience is also important, especially in this industry of investing in rental properties. It’s crucial that you wait for the right deal to come along.
Just because other investors seem to be buying now does not mean you have to. Make certain that any prospective property helps achieve your goals and fits in your area of specialty. This will help you steer clear from the most common investing mistakes.
6. Who will manage the property?
A successful rental property is also one that appreciates over time. However, to be sure that your property continues to grow in value, you should have your property managed by a professional who is both trustworthy and experienced. If you do have the skills to do what it takes, then you have to ask yourself if you have the time. You need to be sure you can handle any 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.
In Conclusion
Don’t jump into purchasing that rental property in Spanish Springs without first making sure that you have the best and most recent information available. Real Property Management Corazon offers a free rental property assessment that can make your decision-making process so much easier. Make use of this valuable service by calling us at 775-826-1414 or contacting us online today.
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