by Scott E McGlon
There are some important considerations before investing in a rental property. Let's take a look at these critical points and evaluate for clarity:
LOCATION, LOCATION, LOCATION! (get it?)
BUILDING PERMITS AND WHAT IS COMING
COMPETITION IN THE AREA
WHAT TO START WITH...
In our strong opinion, the best starter real estate investment is a residential, single-family home or condo. Condos are low maintenance because the condo association is there to help with many of the external repairs, leaving you to worry about the interior. On the flip side, condos can nickel-and-dime you to death with monthly association dues that are mandatory.
Single-family homes do attract a favorable tenant. Expect longer-term renters (up to 36 months!) in the form of families and couples. Families (more than one person) are generally better tenants than one person because of the double-income probability and the because of pooled resources and stability. As an investor to maximize your return, you want to find properties that attract this type of demographic. Make sure your renter application clearly asks for all sources of income from all parties that plan to live in your investment.
SHORT and LONG-TERM REAL ESTATE RETURN ON INVESTMENT...
Once all of your choices are narrowed down, it is important to research the appreciation of other similar properties over the last two years, five years, and 10 years if applicable. In most cases, checking out both the lower end and higher end (real estate that you can't afford) of the market could help define what you are buying is in the most aggressive appreciation bracket. Also, define the variance between asking price and actual selling price of similar real estate investments in the area. To expand your estimate toward appreciation potential, look at what easier cosmetic changes (landscape, exterior color, etc.) could do and the kind of tenants it could produce. What you put into your investment might be a significant factor if you decide to sell within a few years vs. a longer-term investment.
DEFINE AND MANAGE CASH FLOW and WORST CASE SCENARIOS...
Be truthful to yourself when breaking down the financials of your new real estate venture. Projecting monthly cash flow is critical so ALWAYS look at the best case scenario but focus on the worst case as well! Evaluating your projected rent minus your fixed expenses (mortgage payment to your bank, property taxes, escrow (if any), and insurance is just the first step. However, be aware the variable expenses usually hurt real estate investors the most. Before closing, invest in a certified home inspection that you pay for!...do not use the sellers or their real estate agents inspection report! Be present for the inspection and walk around with the home inspector so you can see and hear all of the potential issues with the property. Electrical, plumbing, heating & air, roof, and foundation are all expensive to repair or replace. Do not hire the cheapest home inspection - you want and need the best in your area with a great reputation for conducting a thorough inspection every time. Once you get both fixed and variable expenses defined and your projections are still profitable, act quickly before someone else purchases this great property!
RESEARCH RESEARCH RESEARCH
There is a lot of to be made in real estate and the more thorough due-diligence you conduct, the stronger probability your real estate investment return will yield. Keep your expectations realistic and make sure you rely solely on the numbers - not emotion or how much you like the property. There have been many mistakes made in the investment real estate market - make sure that your own finances are strong enough to cover the worst case scenarios. Good luck!
Scott E McGlon is the President of McGlon Properties, LLC and the author of many blog post on MP Blog. He has been a serial entrepreneur, investor, and president of many successful start-ups since 1998.
MP, LLC credits blog post with the original author and links (if available).
Scott E McGlon is the President of McGlon Properties, LLC and the author of many blog post on MP Blog. He has been a serial entrepreneur, entrepreneur-in-residence, investor, and president/CEO of many successful start-ups since 1998.
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