Investment rental properties give the average person the ability to dictate their own financial future. I think any great investor in the stock market would tell you not to invest in something you don’t understand but we all do it anyway, myself included. I’m not saying to avoid mutual funds, stocks, bonds, IRAs or 401ks-they’re a key component to everyone’s investment portfolio. But investment rental properties allow a person to clearly understand how their money (and the tenant’s money) is working for them.
This post is a look into my brain and how I choose investment rentals, specifically single family home rental properties. My goal is to help you understand what makes a house a good rental home candidate and get you on your way to buying your first rental property.
I should tell you a few important things before delving into this topic. My tips don’t involve getting rich quick and quitting your job. I’m not selling a course and I’m not a real estate tycoon. I’m a regular guy who still has a full time job that I love and I view rental properties as a way to supplement my retirement or pay my children’s college education. I make a passive income every month on my rentals and have accrued profits equal to my 401K. But I’d like to help others avoid costly mistakes that caused me painful headaches and sleepless nights. With that out of the way let’s get started.
First and foremost…
A rental home is an asset you’ll have to live with for years. You better like it aesthetically and it definitely should make money every month. If it doesn’t fulfill these two requirements don’t buy it.
2. The Neighborhood
When choosing a rental house I want it to be in an average to good neighborhood. This ensures future tenants will likely have a means of income, be respectful, and the surrounding areas will be maintained by other home owners.
I like to drive around in neighborhoods to get a feel for the way houses look. It’s like interviewing someone for a job. What are your first impressions?
The houses don’t have to be perfect. If you have a few homes with the gutters hanging from the fascia or paint peeling off the siding that’s okay. But if every other house looks like a movie prop from the latest zombie movie keep driving.
The yards need to be clean of debris and junk. Otherwise rodents may become part of your life sooner than you’d like!
Is anyone hanging out on the corners at 11:00 am when they should be at work or in school. They may be upstanding citizens but if you don’t feel like asking them for directions then trust your gut and keep driving (to the next neighborhood).
3. Even Alice Cooper Discussed School
Prospective tenants should ask about the schools. This indicates they care about their children-a redeeming quality in my mind.
You could ask a real estate agent, wholesaler (someone who sells discounted investment properties) or investigate this topic yourself.
Check out the Great Schools website here. I found it to be pretty accurate.
Nonetheless, schools anchor a neighborhood. If your house is near a good institution then it will be an amenity for families.
4. Make HGTV Proud, Choose a House with Space
The house itself should be 2 to 3 bedrooms with your standard living room, dining room, kitchen, and bath. If it only has 1 bathroom that space should be updated and look attractive.
Why 2 to 3 bedrooms?
This criteria has to do with two thoughts. The first being resale of the home. The good thing about having 2 or 3 bedrooms is the house could be a great starter home for someone.
Secondly, you will attract people who have roommates-friend, spouse, boyfriend or girlfriend, zombie bodyguard, etc. Roommates provide economic stability and spread out the responsibility of rent & utilities. This means you’re increasing the odds of getting paid every month.
With that said, I currently have 4 rentals that are occupied by 4 single individuals. There are benefits that come along with this scenario too but I’ll save my musings for another post.
The last rental home I purchased was close to ideal in regard to space. I’ll explain.
Let’s start with the bedrooms. The master is 16 ft x 12 ft (big enough for a queen bed), the second bedroom is 11 ft x 11 ft (big enough for a double bed and dresser), and the third bedroom is 10 ft x 9 ft (great office for professionals).
When looking for a house you need to envision what will be stored in the bedrooms. A lot of people have a queen bed and this is why I want the master to be somewhat spacious. If the bedrooms don’t have a good closet they MUST accommodate at least one big dresser.
The second and third bedrooms don’t need to be huge, just big enough for a double bed and small dresser. Why? I’ll use my brother as an example. He lived with his college buddy in a 2 bedroom duplex. They each had a girlfriend. Situation explained!
The downstairs of my house has a living room which is 16 ft x 12 ft (big enough for 2 couches & TV), dining room that is 14 ft x 12 ft (dining room table = no problemo), and a kitchen with dimensions of 12 ft x 8 ft.
The kitchen is a bit tight but has a pantry off the back that is 8 ft x 4 ft. My tenant stores all her groceries in the pantry and loves the tight little kitchen that has new appliances, IKEA cabinets, and trendy glass backsplash. Sometimes style and updates override cramped quarters.
Which brings me to the bathroom upstairs. It’s tight like the kitchen. This is a double entendre-there’s not a lot of space but it’s remodeled to make up for this defect.
The final space that’s important has to do with laundry. My house has a large basement that allows for storage and laundry hookups. If you’re geography doesn’t make use of basements then ensure you have a closet where tenants can place a washer and dryer.
I hate going to laundromats and tend to think others feel the same way. Who wants to wash their underwear in the same machine as god knows who else. If you have to do it that’s cool but if you don’t that’s even better. Laundry hookups are an amenity prospective tenants always ask about. Put yourself in the position to say ‘Yes’ to their question.
5. Can I See Your Bus Pass?
I love houses near public transportation-meaning buses, trains, trolleys. This is easy to say since I own rental properties in the vicinity of a moderately sized city (Pittsburgh). If you don’t have this amenity in your town then no worries. Skip to the next section.
Public transportation is great because people who use it are thrifty and save money. These are two qualities you want in a tenant for obvious reasons. Plus, the ability to offer public transportation in your advertisement is attractive.
6. Where’s the Beef or in this case Rent Comps
I’ll tell you where to find great rent comps.
One word. Craigslist.
In a prior post I discuss how to use Craigslist to place your rental ads and why it attracts good tenants. Thus, you can use these ads to find how much houses are renting for in a particular area. And the great thing is there are typically pictures on Craigslist of the houses.
So before I buy a house I always determine the rent I could get. I did this for my last purchase and determined the home could be rented for $775-$850 depending on the renovation. This estimate needs to be spot on. It will determine the purchase price of your house as well as the maximum rehab costs.
In general, I like to have about a .70 loan-to-value ratio (LTV). This means the purchase price of the house and all the repairs must add up to only 70% of the approximated retail value (price the house should sell for after fixed up).
So if you buy a house for $50,000 (closing costs included) then the repairs & holding costs (insurance,utilities,etc.) should be no more than $20,000 if the appraised value is $100,000.
This means you’ll have 30% equity in your house. If you need a mortgage placed on the house (good for you if you don’t!) the bank will be more likely to give you the money.
In Part 2 of this post I will discuss numbers in more detail but for now I’ll focus on the basics of how to choose a good rental home.
7. My First House Smelled Like Dog Urine
It was disgusting to say the least. Primarily because the house was vacant for a few years. And it was a foreclosure, so the people who owned it really didn’t have any motivation to keep up with the maintenance.
Should you buy a foreclosure?
It all depends on the numbers I mentioned in bullet 6. If you can buy a house that just needs moderate work and be into it for 70% LTV while being able to make a monthly rental profit then go for it.
But the house doesn’t necessarily need to be a foreclosure in order to be a good purchase. So keep this in mind.
8. Where Do You Look for Houses? Not on eHarmony!
I’m too busy to look for houses and this is why I use a wholesaler. Who is a wholesaler?
Wholesalers are people who find undervalued properties and sell them to investors. They may make a few thousand dollars and transfer the right to buy the house to you for this fee.
You may like this setup because a good wholesaler will know what type of house you want. You can tell them what price you’ll pay, what condition you’d like the house to be in, and where you’d like the house to be located.
Wholesalers are different from real estate agents in that they generally get a good fee no matter what the price of the house is. Agents typically get a percentage of the house’s sales price.
Finding a good wholesaler or real estate agent helps you be more efficient. You can find both types of professional by going to a local real estate investors club. Visit www.reiclub.com and search for an organization in your area. I did this and it was invaluable.
This post was meant to be a general overview of how to find an investment single family home rental property. You should modify the tips learned here to suit your own needs. But if you have any burning questions please leave a comment, I’d be more than happy to spill the beans.
Part 2 of this post will deal with analyzing rehab costs of potential rental properties you’re evaluating. Don’t miss out on this post as I will share a HUGE tip that saved me thousands of dollars and hours of aggravation. I wish someone would have told me about what I will discuss.
Until next week, make it a great day.