What to Look for When Buying Rental Property
Last week, we discussed the 6 Things You Need to Know Before Buying a Rental Property. On that point, now let’s talk about what you should be looking for when it’s time to buy a rental property. Here is a great article by Holly Johnson from The Simple Dollar discussing the nine things she looks for in a potential rental property!
Image courtesy of The Simple Dollar
#1: Profitable Rental Market
Obviously, the #1 factor we’re considering is profitability and the potential for long-term appreciation. Generally speaking, we follow the rule of thumb that rental properties should rent for at least 1% of their purchase price per month.
My goal is to purchase a single-family residence for less than $150,000 that rents for at least $1,500. After studying rents in my area for a while now, I can say with certainty that this is extremely feasible.
Let’s say we purchased a $150,000 property and put down 20%, for a total mortgage amount of $120,000. At 5% APR, the monthly mortgage payment for a 30-year loan would be around $644, including principal and interest, but before insurance and taxes. For a 15-year loan, which is likely what we’d choose, we would owe $949 per month in principal and interest. If our property taxes were around $250 per month and our landlord’s insurance policy was around $100 per month, our total housing payment would be around $1,200.
Since most single-family homes in our area rent for well over $1,500 per month, this means we could turn a $300 profit and pay off our home in 15 years or less. Of course, this all hinges on our interest rate, down payment, the purchase price of the property, and the variable costs of taxes and insurance.
#2: Simple Landscaping
Another factor we look for in rental properties is simple landscaping that doesn’t require a lot of upkeep for us or our renters. While it’s normal in our area to expect renters to mow the grass at the property they’re renting, you can’t really expect all renters to want to plant flowers or keep up with huge beds of plants.
Ideally, we’d like to purchase another property with simple landscaping made up of some bushes and rock or mulch. At the very least, we would want a property with the potential for low maintenance landscaping if we put in some work upfront.
#3: Three or More Bedrooms
Since we live in an area with lots of families with children, it only makes sense to buy a rental property that is marketable to as many families as possible.
Both of our existing rentals have three bedrooms, and that has made them an option for so many families we have barely had any vacancies over the last 10 years. When buying a new rental, I’d prefer to buy a property with at least three bedrooms, but I would be over-the-moon if we found an affordable four-bedroom home that met all our other criteria.
The more bedrooms you have, the more rent you can charge, and the broader your net of potential tenants becomes.
#4: Major Updates Completed
The reality is, most homes in our area within the $150,000-and-below price range need some work. So far, we’ve looked at homes with outdated kitchens, out-of-style bathrooms, and none of the modern upgrades you find in newer, more expensive homes.
Fortunately, all of that is fine with me. I would never put a new kitchen or bathroom into a rental home unless I absolutely had to. Generally speaking, the only upgrades we invest in are needed repairs, new floors, and new paint.
With that being said, I’m still looking for properties with at least a few major updates made. Homes with a newer roof or HVAC system are given priority, even if those components are a few years old.
Basically, what we don’t want is a home that will need a new roof, a new air conditioner, and a new furnace within the next five years. For me to consider a property with an old roof and old HVAC system, the house itself would have to be one heck of a deal.
While we do have an emergency fund for our rental properties, I don’t want to deplete it right away.
#5: Family-Friendly Neighborhood With Great Schools
Since we want a property that is marketable to families with children, the neighborhood is just as important as the home itself. While we live in a great area with plenty of nicer neighborhoods, I want to be picky about where the property sits and what amenities are available nearby.
If we could find a property that’s in a good neighborhood but also near parks, schools, and shopping, that would be ideal. Obviously, the more convenient a property is, the more people will find it appealing.
#6: Low Property Taxes
In the state of Indiana, property taxes are pegged to the gross assessed value of your property and tiered based on the type of property you own. What this means is, you’ll pay a maximum of 1% of your property value in taxes for your primary residence, a max of 2% for other residential and agricultural land, and 3% for other real and personal property. Basically, property taxes on rental real estate are capped at 2% of the gross assessed value of any given property.
That removes a lot of the guesswork of figuring out taxes, but I would definitely want to look at the gross assessed value of any property we considered – and the respective property tax bill – before I pulled the trigger. We all know that assessments can be strangely incorrect at times, and I want to make sure any property I buy has been treated fairly.
#7: Properties With Noticeable Upkeep
How a property has been maintained can make a big difference in the future costs of upkeep. Unfortunately, we have looked at homes that have had very little upkeep for years – and it shows. It’s never a good look when a home you’re visiting hasn’t had the furnace filter changed for years, or when the home’s siding is dirty, worn, or even falling off.
We tend to look for homes that have obviously been cared for, because a lack of maintenance could mean big repair bills for us down the line. While proper maintenance can be hard to detect, we’re looking for a home that has had its HVAC system serviced and cleaned regularly and is free from damage caused by water, wind, or dirt.
#8: Brick or Low-Maintenance Exterior
While one of our current properties was built with flawless, easy-to-care-for red brick, the other has old steel siding. I prefer brick hands-down, and I hate the fact we’ll probably have to replace the siding on the other property one day.
It looks fine right now, but we’ve had to fix a few of the pieces of siding into place over the years. And the way it looks, a big wind could likely blow some of it off!
Only time will tell, but I’d prefer a home with a low maintenance exterior that won’t cost us a bundle to replace later on. Not only is the mere thought of it a pain, but siding is expensive.
#9: No Water Issues
This is one lesson we had to learn the hard way. When we bought our second property and moved in, we ignored the fact that a small amount of water pooled in the backyard near the stairs of our deck. After turning it into a rental, the problem worsened and our renters started getting standing water in their yard for a few days after a big rain.
Eventually, we had to put in a new sump pump and a new drain beneath the house. We also put a French drain into the back yard that funneled water to the road in front of the house.
These two fixes were enough to remedy the situation completely, but they were very costly and the entire experience was stressful, too.
After enduring that ordeal for years, I am now extremely leery of water or any trace of water or water problems. Ideally, we want to buy a house that sits similarly to the one we live in – high up on a lot with excellent drainage away from the property. If a potential rental house has any inkling of water problems, you better believe I will run for the hills!
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