Buying a Rental Property - Step 4 of 8

Brandon Turner just posted a great article on a basic outline for how to buy a rental property on the Bigger Pockets blog. To follow up, here is step 4 of that outline, expanded based on questions someone new to real estate investing might have.

This post goes hand in hand with the last blog article, as step 3 was "Define What You're Looking For". Once you know what type of property to look for (or properties, if you've narrowed it down to more than one type), you need to start looking!

How much online research should I do before visiting properties in person?

My recommendation would be to do a ton of research online. The internet is open 24/7. You can browse during your lunch hour at work, or in your PJs before you go to bed. You can even browse on your smart phone while waiting in line at the grocery store.

Doing a lot of internet research will also help you see, in your price range, what type of condition of homes are out there. There are foreclosures and HUD-owned properties that may need quite a bit of renovation. There are short sales that might need little renovation. Every market is different so you need to become familiar with approximately what is available to you.

What types of things should I be looking up online before setting foot in the property?

I've found that creating a spreadsheet of properties that I'm interested in is helpful. These are the attributes I take down:

- Address

The address is important obviously for seeing it, but this also tells me about the neighborhood the property is in. I generally look at properties in a few target zip codes. Other investors look in a wider range, but I want to keep my focus to an approximately 3 mile radius. I like this range because I self-manage my properties and the closer they are, the easier they are to manage. Plus, there are way more deals in just a few target areas in my market than I could ever buy, so I don't feel limited.

- List price

I try to keep my search to about 20% over my target sales price in order to give myself some room for negotiation. Personally, I like investing in the $30k per door or less range, but that won't happen in all markets.

- Number of bedrooms, bathrooms, size of garage (if there is one)

I look for either 2, 3, or 4 bedroom properties as those are the easiest to rent out. There is the most demand for 3 bedroom properties, but I've also had good success with 2 bedroom single families. Garages are important in my rental market; tenants really like them, especially because in my market (Milwaukee WI) it gets cold and people like to keep their car out of the elements. I have one property without a garage and it was much harder to rent.

- Square footage, year home is built

I have never really had any problems renting a single family home no matter what size it is (even my smallest SFH which is 672 sq ft), so this isn't that much of a deal, but I do find that around 900 or more rents the best.

I also want to see what year the home was built. My oldest rental is from 1926 and that thing is a rock. But it also has some issues older homes have such as not as much insulation in the walls (still plaster) and not as many electrical outlets (1-2 per room instead of the now 3-4). In my target market homes are generally from the 50s. Some older, some newer.

Once I've reviewed the attributes of the property, I also look at the pictures (if any) that are available. There are certain attributes of a property that I do not want for a rental and if the property has any of those, I don't consider it.

I also use the pictures to gauge the condition of the property. This one if very "iffy" because I've had more cases than not where the pictures made the property look great but once you see it in person, I would definitely not buy it.

Then I take my research a little further. With the wealth of information available online, it makes more sense to spend 5 minutes at my desk than wasting a site visit on information that I could have found out easily. You need to check your local assessor's office and other local websites for information you can glean from properties in your area.

For example, in my area I can check for:

a) Permit information (to see how recently properties have been updated)

b) Owner information (to see if it is/was owner occupied or what bank owns it if its a foreclosure)

c) Property statistics (which are sometimes different than the listing ad)

d) Code violations (which will need to be corrected if I buy the property)

e) Outstanding tax amounts owed

Should I be compiling a list of properties to look at, or will the real estate agent be doing that for me?

I would suggest both. Gather the list of properties you want to see from your online research and let the agent you're working with know that if they come across any properties they think you should see, to let you know.

How do I know I'm looking in the right neighborhoods?

If you're going to self-manage, you may want to look closer to where you live to make it easier, but that's not an absolute. Check out a categorization of A, B, C, and D properties. I personally am against investing in "warzones" especially for those new to real estate investing, but everyone has their own formula that makes them successful.

Once I'm in the property, what are the major items I should be looking at?

Here is what I take with me when I go to look at properties in person.

I look at 3 categories:

a) The major items, such as the roof, mechanicals, plumbing, electrical, siding, and windows. How much will the expensive items cost to rehab?

b) The neighborhood and the property layout. Would someone want to rent here?

c) The cosmetic items. There are lots of little things that could be wrong with the property, and those can add up.

Here is a more detailed list of what I look for when visiting a property in person.

How do I know that this property is "the one"?

Sometimes, you meet that perfect property and you just "know". When you're making an investment, you have to look at the numbers. Never, ever be emotional -- you want your tenants to fall in love with the house, not yourself.

Stay tuned for the next installment of the series where I delve deeper into "doing the math". (And yes, you were now told that there was going to be some math.)