Choosing a new rental property

5 Replies

This is spawned from another discussion:

https://www.biggerpockets.com/forums/52/topics/591...

I really like the input "You didn't buy that house as an investment, so sell it", but to take that a step further; what do you all look for in an investment rental property. I have about $50K equity in my current rental, that everyone recognizes should probably be sold.

I know the 2% rule (rent should be 1-2% of total cost of home purchase), but I would love to know more about what works for you guys. I am really new to the rentals as an investment, instead of the rentals as a necessity to get to a new home.

I'd really love to obtain a multifamily home in the next year, so input on these or single family homes would be solid.

I hate the 1-2% rule because it doesn't account for a lot of things like property taxes etc.  The best things to look for will be the location, a rental in a good location will usually be better over the long term.  The second is the cap rate, this is essentially the return on your money if you bought with cash, this takes into account expenses making it superior to the 1% or 2% rule in my opinion.  Cap rates will vary based on location but once you have evaluated enough properties in a given area you will begin to know what is a good cap rate and what is not.

@Dennis M. that isn't why I hate it.  I hate it because Let's say a 1% property in TX vs a 1% property in CA or more realistically NM or OK

$1,500/month on 150k in TX with 2.8% property tax

or

$1,500/month on 150k in CA with 1.1% property tax

with all other expenses being roughly equal property tax in TX would be $4,200 while in CA it would be $1,650, that makes a big difference.  Yes I know you can't find 2% in CA but I am not a fan of rules that supposedly apply nationally.

Use the 50K for another rental property. I'm not actually investing just yet but let's say your tenant from SFR leaves. You have a 100% vacancy & you have to pay the mortgage + other expenses. & if you have a 4plex & lose a tenant then you only have a 25% vacancy & still generating income from other tenants. I would take multifamily over SFR anyday just because they are always there & I wouldn't have to work as much to get the mortgage paid month after month

I agree with Ivan to a point that multifamily will usually never be 100% vacant, but if one or two mortgage payments will blow a hole in your budget, that probably means that you don't have enough reserves and shouldn't be investing in RE until you do.