At PropLogix we work with a lot of title agents, real estate attorneys, real estate agents and investors. Investors have a unique perspective when it comes to the real estate transaction process. Mitchell Jaworski is a real estate investor and author who is passionate about helping people "buy right" and make better financial decisions.
Whether you're interested in dipping your toes in the water of real estate investing, or want to know more about how investors operate to gain their business as a title company, keep reading.
- Lindsey Gordon, PropLogix
Owning rental properties are a great investment as they provide passive income and build equity for wealth. However, that is only true if we make a good purchase.
Here are five things I look for when buying a rental property:
1 – Price-to-Rent Ratio
Generally you want to meet 1% or better. Meaning if a property costs $150K then the rent should be $1,500 or more. When you factor in carry costs, etc., 1% is a general threshold between cash flowing positive or negative.
Be sure to still run the full financials through a property calculator for a clear picture of your potential returns. However, the 1% rule is a good guide for a quick, offhand calculation when need be.
2- Keeping Maintenance Costs Low
How exactly do we do this? I mean stuff breaks, right?
When acquiring property the goal is to find one where high cost items still have a long shelf life. Otherwise, pricing the replacement of them into your offer is prudent.
Items such as:
- HVAC system
- Major appliances
- Water heater
If any of these are near the end of their estimated lifespan, they become large expenses you can get hit with in the early years of owning your property.
Setting aside a portion of rents as reserves for large replacement costs is part of being a good property investor. However, those reserves need some time to build up. If your HVAC unit dies in year one – your profits just took a big hit.
3 – Clean Title
This is one that many investors tend to let the “process of closing” handle for them. However, you do have a say in the title company and lien search provider when buying and especially when selling.
This is particularly important when you are buying cash as there will not be a lender forcing you to get a lien search done. To ensure you are receiving a clean title in an instance like that, you will want industry leading service.
Not all title companies and lien searches are created equal. The last thing you want to discover after closing is an open permit or code violation that slipped through the cracks because you received a subpar lien search. Yes, this really can and does happen.
Through networking with other investors and performing due diligence I have found quality title and lien search companies. Here’s a hint: PropLogix is definitely on my list.
4 – Good Schools
For my investing goals – properties in good school districts are beneficial because rental demand for two and three-bedroom townhomes largely come from new families with young children.
Having a rental property in a good school district sets you apart from the pack in their eyes. Plus, good schools usually go hand-in-hand with good neighborhoods.
On the flip side, if you are investing in two-bedroom condos near a downtown city center then school districts really don’t have as much bearing.
Thus, know what your investing goals are and act accordingly.
5 – Listings & Vacancies
In the end, we must be able to fill our rental property for it to make a good investment. Always make sure to check the current listing of the neighborhood or community you are looking to purchase in.
How many properties are listed for rent and what is the average days on market?
If a bunch of available properties are sitting on the market for a few months - you now know renting out a property in that area will be more difficult and the chance of vacancies is higher.
Always be sure to run the numbers before making offers. If you need a property calculator feel free to use mine. You can download it at http://scaredycatguide.com/Have other rental investing questions? Contact me at: [email protected]