5 Tips for Buying Rental Property

5 Must Know Tips Before Buying Rental Property

Are you looking into buying rental property?  Residential rentals have long been a lucrative way to invest and thanks to the internet and property management specialists, it’s easier than ever. Virtual tours, lots of photographs and mortgage calculators help you from the start.

Location characteristics are much easier to identify online than they are in reality. Aerial and street maps provide instant images you need to study neighborhoods and mapping software lists the local amenities you need to know like schools, shopping, parks, and major buildings.

Dig deep enough and you can find the last known selling price for a home and its current value. Ask a property management and real estate agency and you can find all the homes listed by the MLS in a zip code for sale. Need more information: ask them to sort by type of home and other variables like swimming pools, master planned communities, bedroom and bathroom count, days on market and price.

Before you start buying rental property, here are the basics for property acquisition, from assessing the market to financing a property and identifying the opportunities best for you.

1. How’s the Market?

You’ll need to know what kind of a return you’ll get on the property. Use the internet to find what rents are in the areas in which you’re interested. Websites that specialize in rental listings almost always provide the size of the unit for rent along with its monthly rent.

Sites like Realtor.com and Zillow also list a few apartment communities, but they’re especially good for looking at rates for single-family homes. Craigslist is also a good place to look for rental rates for available rental homes.

Vacancies are a reality of the rental market and the real estate agency, American Dream Homes, Inc. in Orlando, can give you the background you need as well as current trends in the local market. We are an Orlando property management company and can help you find homes that meet your criteria as investment properties.

2. Crunch the Numbers

You will typically need at least 20 percent down payment to qualify for a mortgage on an investment property and have qualifying ratios from 36 to 45 percent, depending on your credit and other considerations the lender may make. The down payment can’t be from a gift and you may need to show its source.

Give the down payment requirements special attention. You may not be able to use gifts, but you can easily use partnerships for real estate investments. Your friends and family can pool their money with you to buy a property, or you can search out real estate-oriented crowd funding sites online. Limited liability partnerships eliminate the liabilities of the money partners.

When you have a plan in place for purchasing and funding rental properties, apply the 1% rule. If the property doesn’t return one percent of its purchase price, it probably won’t pencil over the long term, unless you are buying specifically for appreciation. For example, a $200,000 home should rent for $2,000 a month, which works out to one percent.  Now don't take the 1% as a must-have given that Orlando is continuing to see increase in population and strong job and market growth, and it is much more difficult to find an investment home that meets the 1% rule.  However, this is a good rule of thumb to gauge your investments.  

When buying rental property, perhaps the biggest number you need to pay attention to is the cash flow.  Some would say that cash flow is king.

3. Homeowner Associations (HOAs)

HOAs provide all the exterior and landscape maintenance in condo communities and subdivisions. Some master planned and standalone single-family communities have HOAs as well and may offer varying degrees of community maintenance.

The upside of an HOA is that it keeps the community well maintained and protects home values by having strict rules regarding exterior appearances. The downside is that the HOA can have strict rules regarding rentals properties. They may or may not allow them and some HOAs have the power to change their rules anytime if they have enough votes.

You won’t be able to avoid HOAs if you buy a townhome or a condo, but you do have choices if you want to fill your real estate portfolio with single family homes. As a rule, homes in master planned communities have HOAs while those in smaller or older subdivisions may not.  When you start buying rental properties, don't forget about the HOA!

4. Maintenance Issues

How much maintenance do you want to do or can you do? If your answer is “not much,” let the professionals at American Dream Homes help you.

There is much to be said by working with a professional property management company to manage and maintain properties. They use qualified and licensed contractors for home repairs and maintenance. Even better, they find qualified tenants, take care of cleaning the property at move-out and move-in and keep meticulous financial records.

5. Location, Location, Location

Even state-of-the art technology hasn’t changed the fact that location for all residential real estate still rules.

The locations you choose for rental properties will be driven by housing prices, proximity to employment centers, and the characteristics of the commute. Most people want to live as close to work as possible, as long as there are viable housing options in the area.

• Search online for the major employers in Orlando and put them on a map. You might want to color-code the types of employers there are by location. As a rule, the majority of people working in the retail and tourism sectors earn less than those working in health care, manufacturing and business and personal services.

• Find the major transportation corridors. People need to get back and forth to work and freeways are a preferred method. Look for properties that are near employment centers and are a reasonable distance to freeways or major arterials.

• Identify where the shopping areas and essential services are and the types of products they offer. Go online to find websites that provide mapping services like MapQuest to find the amenities near specific locations. You’re much more likely to find high end malls and stores in affluent areas (the Whole Foods Effect) than areas where Wal-Mart stores dominate the retail landscape. Note where and how many hospitals are in an area.

6. (BONUS) Property Condition

After you’ve chosen the areas where you’d like to invest, identify the types of properties you want to acquire. While fixer-uppers will be less expensive, they’ll also involve much more work and upfront investment before you can rent them. However, if you’re a do-it-yourselfer, you may be able to make the improvements and add value to the home.  

You’ll need a property inspection before the bank will fund the mortgage and the results might give you leverage with the seller. If you work with a turnkey property management agency like American Dream Homes, you could find properties that are ready to occupy or some that have long-term tenants already.

Bottom Line

The tools for finding the right property are available online and with the help of an Orlando property management company, the search will go quickly. All real estate is local and relying on our pros will help you achieve a productive acquisition.