What I Look for in a Rental Property

25

I get asked quite a bit what I look for when I’m shopping for a rental property to buy. How do I know what I want or what qualities to be concerned with and which ones not to be? Here is my very basic list of things I think about when buying rentals.

Download Your FREE copy of ‘How to Rent Your House!

Renting your house is a great way to enter the world of real estate investing, but most first-timers (understandably) have a lot of questions. Fortunately, the experts at BiggerPockets have put together a complimentary guide on ‘How to Rent Your House’. All the skills, tools, and confidence you need to successfully rent your house are just a mouse-click away.

Click Here For Your Free Guide to Renting Your House

Considerations for Buying a Rental Property

  • Source of the property. I’m immediately suspicious, especially in booming markets, of any property that has been on the MLS for more than a couple days. Inventory for investors is so thin in some markets, such as Atlanta and Houston, I guarantee if a property is listed, and especially if the price has been lowered, something is wrong with it.
  • Price. A house’s price says a lot about its condition and value. I don’t buy cheap because I don’t want the problems or risk that are more likely with cheaper properties. If an investment property is listed around market value, I don’t necessarily mind. It depends on what I’m getting for the money. This is more specific to turnkey rental properties.
  • Macro-market. What city do I buy in? I go for cities that offer cash flow plus appreciation potential. Cash flow is all that really matters, but if properties are similarly priced I want to go for the market that shows signs of impending growth. The good markets to buy in will always be changing. Phoenix used to be great, but the numbers there typically don’t work anymore. Atlanta took the reins after Phoenix and there are still deals there, but they are finishing out. Houston is taking Atlanta’s place now. Those are cities that are, or were, great for cash flow and appreciation potential. Cities in Ohio, Michigan, and Indiana for example, are great for cash flow but not so likely to appreciate like a lot of others.
  • Micro-market. Where within a macro-market do I buy? What neighborhood? First of all, you won’t be able to buy in the nicest areas of a city. For numbers to work, you’ll be looking at the more middle-of-the-road areas. The price-to-rent ratios just won’t work in the fancy neighborhoods. Once in the areas that make sense for numbers, I love to buy in primarily owner-occupied parts of town or neighborhoods, but renter-heavy is fine too. Some people worry about school districts, because being in a good district is good for allowing a property to hold value. However, I would not rule out a property just because it isn’t in a particular school district. Vacancy rates are good to know, as well as average income. I don’t look at crime rates because I’ve never seen a crime statistic that was ever very representative of the actual safety of an area. If I trusted reported crime rates I would never live in Venice Beach where I leave my door open and unlocked when I’m not home.
  • Cash flow. I should put this one at the top of the list. Actually I should put it at the top of the list, in the middle of the list, and at the end of the list. If there is no sign of positive cash flow from a property, it’s time to bail. The numbers should be #1, always. There should be solid reason to believe there will be positive cash flow on a property in order for you to buy it. None of this “well the area is anticipated to grow a lot!” No, if there is no cash flow, steer clear. Don’t fall into the trap of the crystal ball of appreciation.
  • Cap rate. Similar to cash flow, but now we’re talking a specific rate of return known as a “cap rate.” Understand that cap rates are much lower than they were two years ago. Don’t fool yourself into being fixated on getting a 15% cap rate. It won’t happen unless you have some killer inside contacts. Understand the trends and markets before you scream about what cap rate you require in a property.
  • The % “rules”. Use them as a guideline, nothing more. Nothing grinds me more than hearing someone starting their shopping with the strict requirement that a property meets, say, the 2% rule. Requiring that rule be met is ignorant. For one, it may not be realistic in a particular market at all so it shows immediately your lack of research, and two, if you are so focused on meeting one of those rules you are most definitely ignoring other important factors that go into a good rental property.
  • Condition of the property. I only buy turnkeys for myself, meaning they are fully rehabbed when I buy them, so I can’t speak for condition considerations very well, but my best advice is to make sure you are as confident as possible about the actual condition of the property before you buy it. You don’t want any surprises. A good home inspector is your best friend.

These are the things I can think of just off the top of my head that I consider when buying rental properties. Obviously I’m leaving out details on a lot of those points, but this list is just to get you started. I’ll probably think of other things once the comments start coming in.

What do you look for when shopping for rental properties?

Photo Credit: chase_elliott via Compfight cc

About Author

Ali Boone

Ali Boone(G+) left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor in 2011 and managed to buy 5 properties in her first 18 months using only creative financing methods. Her focus is on rental properties, specifically turnkey rental properties, and has also invested out of the country in Nicaragua.

25 Comments

  1. Hello Ali,
    I am a new investor in Houston, Tx. To raise funds for my long term REI goals I have started out wholesaling. I put my first deal under contract and thought it would be good for a buy and hold investor because it has less than $3K work. I studied the rehab investor formula but should have put more time into the buy and hold investor and what they look for before I took this deal. This article has helped a lot. The ARV is $105-110K Asking $97K with less than $3K repairs to sheet rock but its move in ready and would make a great owner finance or rental once investor purchases it. Rent comps are $1250-$1350. I have it under contract for $93K and its been almost 2 weeks…should I go down on the price or wait for the right buyer?
    Thanks so much for the article.

    • Hey Lashinda! I can’t say for sure on the sales price, as I have never dealt with selling a property myself so don’t want to give less-than-educated advice. Maybe some of the readers can respond to your question.

      Sounds like you have a really good handle on getting started in RE! Good for you!

  2. To each his/her own. I would never buy market price, as there would be no cash flow for years.
    The idea a good (the very best) home inspector does not exist, rehabs of older properties for flip purposes are generally a study in cosmetically covering up problems some of which can be serious.

    Finding a bad property in great rental area is a lot safer approach, for a long term hold.
    A most recent property that I elected not to buy is a perfect example. The house next to one I already own, was the worst on the block for as long as I can remember.

    Thinking it ridiculous the offer above my most generous offer to the owner, another fellow won the deed. Immediately the crumbling brick facia was sided over, the leaking roof including the rotted wood was patched to the minimum degree as to just allow something to nail the new shingles to. The sagging cornice was handily sided over, and the rear shed addition which should have been torn down as it was built on a patio with no foundation received a coating of siding as well. New drywall over the interior crumbling walls and new electrical fixtures connected to the knob and tube electrical wiring finished off the project.

    This house is now for sale listed just under a place I am selling just down the street. The difference is the $70K I spent on a $15k purchase, wear as this fellow spent $15k on a $50k purchase. The end buyer (investor) of his house will be tortured with years of maintenance issues, where as the end buyer of my house will have a new house with little maintenance to deal with.

    Exactly how does a home inspector look behind new sheet rock and siding? I have never seen a inspector so much as remove the cover of an electrical outlet to see if the wiring is newer.

    • Dennis,

      I believe you’re in the Philadelphia area – I do know of an inspector who is also an investor who serves SE PA area. He climbs on the roof (weather permitting), he opens electrical panels (to see the age of wiring into the panel), and he will check the wiring (I had been told of knob and tube wiring by him in more than one property). PM me if you want his info.

    • Good points Dennis. Great things for everyone to consider!

      I only buy at market price if it’s a turnkey or similar setup. If it needs any work, no way would I pay market. But buying at market doesn’t necessarily mean it won’t cash flow. All mine do, and very well.

  3. I like what Karen Rittenhouse said in one of the early podcasts (I think show 2) that rental properties are like “little oil wells” that keep on pumping when you are not around.

  4. I personally love homes that need work, because I can get them cheap ! They usually cash flow much better after they are fixed up and my returns are better even with the additional cash outlay.

    If there were turn key rents that cash flowed as well or close to the ones that need work, I would definitely go the turn key route.

  5. Junior Salters on

    Great article, Ali. What is your reasoning behind buying only turnkey properties? What cash flow do you usually see in Atlanta with those properties if you don’t mind me asking?

    • I only buy turnkeys Junior because I have absolutely zero desire to put forth a lick of effort towards any of my properties. I just want cash flow without the work. There isn’t “zero” work involved with turnkeys, but they are the closest you can get to it (unless you have some swanky hookup for turnkey-similar properties).

      For Atlanta, back when I bought a couple years ago the caps were between 10-14%. But now you’d be looking more at the 6-9.5% range. At least for turnkeys. Still good returns.

  6. Hi Ali. I enjoy your articles. Hey how do you determine if a neighborhood is primarily owner occupant or not? That would be useful knowledge for me to have just wouldn’t know how to acquire it.

    Thanks

    • Hey Joel. The best way to find that out is to talk to property managers. They are usually very up on information like that. You can also probably take a good guess as to whether an area has more owners. It’s just usually the nicer neighborhoods, probably a little further out from the major cities, etc. Just depends.

      • Hi Joel & Ali,

        You can also ask your title rep to get the info for you. They have access to the county recorder records and can run a simple search for owner occupied homes in a specific area and compare it to the total number of homes. In So Cali, Realtors also have access to this information.

  7. Ali,

    I love to see other investors criteria. I can then compare to my own. Lets me evaluate my strategy. I’m not a big fan of paying market prices simply because I don’t have to. I like the cushion provided by instant equity. It also helps increase my cashflow and return.

    I do like the philosophy of rehabbing upfront and taking care of all the major and minor issues right away. In your case purchasing fully remodeled homes. Nothing hurts more than having expected cashflow eaten by deferred maintenance.

    Jason

  8. I usually buy properties that are structurally sound but need work. I have several criteria. Location is very important. I only buy rentals in areas better than where we currently live and where the local government likes investors. (We had been living in marginal area for a long time before we decided to become investors to supplement our income. We don’t invest where we live because the local government tacks on a lot of fees everywhere.)
    I look for 3 bedroom, 1 bath homes with basement and off street parking for at least 2 cars – preferably with a garage. I try to have a decent size living room and at least one decent sized bedroom. Closets are an asset.
    I monitor rents. As a general guide a house in only worth monthly rent x 100. For example if rents are 1,000/month, the house is only worth $100,000 to me. Luckily, right now after 10 years of no rent increases, rents are increasing. I think it’s because there are less nice, rental houses available due to the large number of deteriorating, vacant houses. However, the number of vacant houses seems to be decreasing in some areas.
    Price is important. I know right now that the bank appraisals are running about 30-50k below assessed values in the area that I invest in. Of that I can only re-finance out after bringing a property up to my standards at 65-75% of bank appraised value. Therefore, I subtract the cost of the repairs from money I use from our line of credit.
    I look for a house that is structurally sound but is not a retail property. I usually have to fix leaky basements, fix porches, upgrade kitchens, upgrade bathrooms, replace windows, doors, furnaces, and/or add central air. I usually have to haul out garbage, clean up yards, thoroughly clean interior, deodorize and paint.
    I am looking to buy and hold so I need positive cash flow because I like managing my own properties better than buying and selling. I watch interest rates closely and try to get fixed rates whenever possible.

    • Hi Jay. The best way to see a breakdown is to scroll back through my articles on here and look for the one called Rental Property Numbers So Easy You Can Calculate Them on a Napkin. That was an actual property and you’ll see the cash flows.

      As far as what is acceptable, that answer varies a lot- what is my goal, am I splitting profits with a partner, what market is it in (you can’t expect unreasonable amounts of cash flow from any one market), etc. Back a couple years ago I wouldn’t settle for less than $300-500 net income per month after financing costs. But you can’t get those anymore. Now it would be more in the $100-300 range most likely. After financing, not an all-cash buy.

      The real goal though is if you are making positive cash flow, it’s a winner! Just don’t test that margin too small or it may not always be positive, if that makes sense.

  9. I agree with your cash flow comment and the emphasis that you place on it. If the seller puts forth the “appreciation” or “hot market” comments, then the seller is just talking up the price.

  10. you mention creative ways to purchase. Can you elaborate? I just bought my 2nd property in 10 months and looking for ways more suitable than 20% down all of the time. I’m like you, I try to find turn key properties in good areas 100k-140k. I’d like to buy more before interest rates rise and push me out of the market.
    Thanks

    • If you go the traditional mortgage route Brad, unfortunately 20% down is about as cheap as you can get. The only way to lower it that I know of is to bring in an investment partner who will put up the money. I technically bought some properties with no money down because the investor put up the cash and I took the mortgage and did the work.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php