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Tips On Buying a Home for Rental Income

Handing over cash.

With today’s low interest rates, it’s a great time to buy a house. Even if you’re not in the market for a new home yourself, you can still take advantage of the deals by buying a rental property. That’s not quite as simple as it sounds, however, so take a look at some of the things you’ll need to think about.

Consider the Neighborhood

The neighborhood is probably the most important aspect of buying an investment property. Proximity to jobs will determine what kinds of tenants will want to live there, and the overall quality of the area will factor into how much you can charge and what your property will be worth in a few years. Lower-income neighborhoods will cost you less on the initial investment, but will also bring in less rent, while higher-income areas are the opposite. Typically, middle-income neighborhoods are a safe middle ground.  Also, keep long-term resale value in mind.

Schools

Some of the most stable tenants are families with school-age children, so the schools in the area should factor heavily into your decision. Parents are willing to pay a higher rent to get their children into better school zones, so a little research to see which schools are the best in your area can really pay off.

Taxes and Insurance

No, they’re not fun to think about, but taxes and insurance are definitely something you’ll need to check. The purpose of a rental property is to generate cash flow each month, and high property taxes and insurance can really cut into that. Your real estate agent should be able to check into previous taxes paid on any property. As for insurance, this will vary based on the value and location of your home, but you can try to minimize it by picking a location in a safe area. Places close to fire departments frequently get discounts, and you’ll want to pick something with a relatively low risk of floods, too.

What’s the Rent?

The rent, of course, is the reason you’re buying the property, so spend some time getting a good estimate of what you can charge. If the place has been rented out previously, you might be able to get that information, but if not, look at what other homes in the neighborhood are renting for. You can add a little to the average rent if the home you’re looking at is larger or nicer than average, but in general, you won’t get much more than the neighborhood average even if your property is substantially nicer. If you can’t find any other houses in the neighborhood that are being rented, that can be a sign that people in this neighborhood prefer to buy rather than rent: Stay away!

Don’t Get the Nicest One

As mentioned previously, you won’t get much more than the neighborhood average even if you have the nicest house there. Property value and rent tend to average out over a neighborhood. So don’t spend more than you have to. You’ll get more rent for the cheapest house in a good neighborhood than for the nicest house in a mediocre neighborhood.

Be Skeptical of Good Deals

That said, if a house is significantly cheaper than average for a neighborhood, you’ll want to look carefully at why that is. If it’s just an easily-fixed aesthetic issue or if it’s because the house is a foreclosure, great, go for it. Often, though, a cheap house is cheap because it’s in bad repair, and that can mean high maintenance costs or difficulty finding tenants.

Take Your Time!

There’s a lot to look at when picking a rental property, but remember that it’s okay to take your time. You also need to be aware and up to date with landlord laws and responsibilities, or consider using a management company.  There will always be good properties available in every market, and if you let one slip by while you’re doing your due diligence, that’s okay. It’s a lot better than buying something fast and regretting it. So do your research, look into neighborhoods and rents and property taxes, and when you find something that looks like a good prospect, sit down with your real estate agent or lawyer and go over it to make sure everything adds up. It’s an investment, remember, so it pays to take your time with the numbers.

by DAN CAMPANELLA, Broker/Owner @ R.E.INVEST Brokerage, LLC. on June 25th, 2013.

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