With the volatile roller coaster ride on the tracks of the stock market, it might be time to diversify your portfolio with a rental home. Rental property is not a buy and hold strategy, unless you hire a competent property manager to not only manage the day-to-day operations of your investment, but a property management service that can help manage and add value to your asset, aka rental home. Not only can rental property provide monthly and long term income, but there are tax advantages to owning rental property.
The key to buying rental property for an investment may seem obvious, but is often misunderstood. Buying a home not only at the right price, but positive cash flow is the crucial element. It is critical to learn about the real estate rental market, so you know what landlords are charging for rents near the subject property that you are considering buying. Be conservative with your monthly rent numbers by going with the lower end of the spectrum with comparable home data. A property manager and/or real estate professional can add value by providing rental comparables, as well as sales comparables. Be sure to account for taxes, insurance, HOA (if applicable), water and sewer, and other expenses that are not normally passed along to the tenant in your area. For example, in the Stapleton neighborhood of Denver, most landlords pay HOA fees; whereas landscaping, water, sewer and trash expenses vary from property to property.
Cash Flow
Research the rent and sales comparables with your real estate professional. Take a look at Craigslist (be mindful of the scammers out there), local classifieds, Trulia.com, rentals.com and other home rental websites to get a feel for demand and pricing. This will give you a barometer for the market. Most major metropolitan newspapers will have archives of articles about the rental home market in your area. In the Stapleton neighborhood, TJC Management has a good handle on pricing, as we manage over 150 homes in Stapleton, Park Hill, and Lowry.
Because property managers have an intimate understanding of the rental market pricing, they can immediately add value by providing you with a realistic monthly rental income for your investment property. Should you not know the market and price your property too high, then you could be sitting on an empty home with no rental income for several weeks. Should you price it too low, you may leave money on the table. Let a property manager do the day-to-day management, so you can enjoy the important things in life. There is no reason you need to deal with lost keys, broken sprinklers, or any of the other minor issue tenants may need while renting your home.
A good rule of thumb for analyzing an investment property is by calculating monthly expenses, such as: mortgage payment, taxes, insurance, HOA, water & sewer, etc. Subtract the expenses from the prospective monthly rental income and you should have at a minimum $300-$600 monthly cash flow. This obviously depends on how much capital you put down to purchase the property and the terms of your mortgage. If you paid a $100,000 for a property and are making $200 per month in positive cash flow, then you are probably in a good position.
Location...Location...Location
Like the old adage, location...location...location, still rings true. Make sure you purchase a property in a neighborhood you understand and see rental rates increasing year over year. Review local government websites to learn about the crime rate and school systems. Who is the average tenant? Is the property in a college town? In Stapleton, there are several business and medical professionals that move into the area for short 1 to 2 year stints and move on.
State & Local Regulations
If you are considering buying an older home, make sure you know the local rental home regulations. The last thing you want to do is buy a home that is considered a 4-bedroom for a homeowner, but legally the home can only be a 3-bedroom as a rental home.
The nuances of each municipality and state regulations vary, so do your homework or hire a property management professional that is well versed in the local regulations. Make sure the rental property is up to current code, so you do not inherit some unwanted expenses. Another important factor to consider is owning the rental property as an LLC to protect your personal assets. Be sure to speak to a real estate attorney about ways to protect yourself and your assets.
Parking
Parking requirements vary for rental homes from state to state and town to town. Be sure you understand the requirements of the township to avoid costly headaches. Some townships require that each renter in the home must have an off-street parking space. Other townships may demand a minimum number of parking spaces depending on the square footage or a specific number per property type. Not only do you have to adhere to local regulations, but garage or off-street parking is very desirable for some rental homes.
Home Inspection & Safety Concerns
A home inspection is worth its wait in gold. A licensed home inspector can provide insight into major issues and safety hazards. A few of the major issues that a qualified home inspector can point out are the following: mold, radon, asbestos, and lead paint. It would behoove any real estate investor to connect with a qualified and reputable home inspector. Feel free to contact us for a list of a few home inspectors in the Stapleton area.
Below is a list of potential safety hazards that rental home owners should be on the look out for:
Carbon monoxide & smoke detectors
Broken railings and steps
Aging decks & patios
Gutters & downspouts that cause slippery walkways
Pools, fountains, and hot tubs without safety fences
Antiquated electrical, no GFI outlets
Home Design, Construction & Mechanical Systems
The style and architecture of a potential rental home should be considered before investing. A good rule of thumb is to count the number of corners on the home. A home with four corners will most likely be easier to maintain than a modern home with several corners. A contemporary home with a spanish tile roof may peak your interest, but the cost to maintain and refurbish a home with high end exterior finishes and design accents may be cost prohibitive. The ranch or colonial home in the same neighborhood with standard features will most likely be much easier on the wallet when it comes time to make repairs or add another bedroom.
Be sure to consider the layout, storage space, and amenities. For example, a house built on a concrete slab versus a home with a basement, can cost you precious living space and storage. A home built on a slab can be problematic, as the electrical and plumbing systems can chew up your square footage. Even worse, plumbing and electrical lines could be buried in or below the slab. This could prove costly if you have to repair the plumbing or electrical in the home.
Another factor to consider when analyzing an investment property is the mechanical systems: HVAC, plumbing, and electrical systems. Are they updated? Are the systems easy to access? If the property is an older home, then you will most likely need to budget for additional costs associated with repairs. Consider the lot and the landscaping. If the property is on a big lot or has complicated features to the lawn, then you may want to reconsider the property as an investment. Look for rental homes with lawns and flower beds that will be easy to manage. Be sure to investigate the patio and deck to ensure they are safe and up to code.
In closing, take some time to create a business plan for your rental home investment. Create a budget and run it by a real estate professional that knows the rental market, so you have accurate pro-forma income and expense numbers. Make a plan for lost revenue due to vacancy and budget for unforeseen repairs that will need to be made. Set aside several months of rental income each year, so you are prepared for issues and future improvements.
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