I’ve brought up real estate a number of times. It is a great tax saving tool, appreciating asset and source of income. I’ve also brought up the role that real estate plays in my life, whether it’s through me getting a good deal on my primary residence, helping clients with their real estate transactions or being on a quest to find a good rental property that will increase my household income without requiring too much more of my time. However, knowing that real estate is a wealth building tool is only the first step. To be successful, you must know how and when to select the best property to maximize your dollars. I will give you some of my tips for choosing the best investment properties. It doesn’t mean that’s all you’ll have to do. Buying real estate is an important step. But these are going to be some of the most basic things to consider to avoid what could certainly be a disastrous choice.
Location – Location for the house you’ll rent out is not going to mean the same as location for the house you intend to rent out for income. You need to determine what will work for most people because it’s a numbers game. You don’t want to reduce your pool of potential tenants because your location is too restrictive. Buy in an area that is convenient to accessing the biggest city or town in your area. Whether it’s quick highway access, availability of public transportation or a walkable neighborhood, you need to make sure that your tenants can go to work and get their errands done with ease. Safety also makes a difference. A questionable tenant who is up to no good himself or a police officer might not mind a bad part of town, but young professionals, particularly women, and young family will cross you off the list.
Size – You want to pay attention to what is renting in the general area. You also want to be careful with the price. Personally I think 2-3 bedrooms are best. Those sizes make it easy for a wide variety of tenants to afford the rent: young working roommates who want to split a 2 bedroom, a couple with no children who want a guest room and/or office space. A young family who might want to rent a 3-bedroom. If you go with a 1-bed or a studio, you may inadvertently reduce your pool because you’re pricing people out of the apartment. For example, a 1-bed in the most affordable part of Boston can cost $1,500. However, a 2-bed will run between $1,800-2,000. A pair of roommates can split the 2-bed and pay $900-1,000 each, $500 less than each would in a 2-bed. Once you start going any larger than that, you run the risk of not having a large pool of tenants because most people who need to live in a 4-bed are usually looking to buy by the time they get to that point. At least in my area, that’s how it is. Large rental homes (4-beds+) usually perform better in the parts of town that are walking distance to a university. Anything of that size further away will struggle.
Price – Being a landlord is a business. Your goal is to maximize profits. While you set your rent price, the most realistic rent is mostly dictated by the market. That means, you can only ever charge so much. The only other way of increasing your margin is by controlling your expenses. You need to make sure you are at least breaking even on your monthly expenses (including variable and estimated incidentals) with the lowest possible rent in the area. Don’t let your mortgage be equal to or greater than average rent, let alone more with the expectation that you’ll get top of the market rent; because, if that doesn’t happen, you could be in serious trouble.
Maintenance Needs – Know what you will need to meet your city or town’s habitability standards and to provide adequate service to your tenants. Some properties are cheap for a reason. If you save $15k but it will cost $25k to make it an adequate residence, the property might not be such a good deal.
Quality – One of the worst things you can do is price yourself out of the rental market. The way to make that mistake would be to either buy the best house in the worst neighborhood, or to spend an great deal of money turning a property into the best house in a bad neighborhood. Your potential for rent will be limited although you need a certain amount of money to recoup your costs. The quality of the property should be reflective of quality of the neighborhood.