Rental properties come in all shapes and sizes. You can purchase a condo, a townhouse, a single-family or multi-family home, or you can purchase a 100-unit apartment building. You can even buy an empty lot and build just about anything you want on it.
When looking for rental properties, I keep in mind certain criteria that the property needs to meet in order for me to consider purchasing it. Because there are so many avenues for investing in real estate, I will focus this article on single-family properties for simplicity. Regardless of the type of property you are looking to buy, these criteria are applicable to all kinds of properties, not just single-family residential.
Many real estate investors agree that the most important part of real estate investing, the most important part of making a deal work, is buying the right property. No amount of work after-the-fact can fix a bad deal. The goal is to get the best deal you possibly can and then improve on it. Buying below market will give you room during the renovation process. If you bought above market, or if you bought a property too dilapidated to be reasonably fixed in a budget that works, then there is no way any amount of work, time, or money thrown at it will make it a good deal.
So what exactly should we be looking for when we’re analyzing deals?
There are a few criteria that I keep in mind. Your own criteria will depend on your goals. Identify these first, and then you will know for a fact what is a good deal and what is a bad one, as it relates to your own real estate journey. What might be a great deal for one person, might be totally undesirable for another.
With that said, this is what I look for when I’m looking to purchase a new rental property:
- Square footage: I look for a home with decent square footage that I can utilize to build an extra bedroom and/or bathroom. This is the first detail I look for. A home with too little square footage means there is not much room to add value to the home or to bring it up to a new tier of appraisal.
- Opportunities to change the structure: I look out for a home that has a wall dividing the kitchen and living room, and/or dining room, or a wall closing in the hallway to the rest of the bedrooms. The reason being is because closed floor plans are less desirable than open ones, and a home like this can be bought for less and be then turned into an open floor plan with the use of a hammer, increasing its value.
- Old fixtures and other non-modern details: Some homes have been occupied by the same owners or tenants for the last 30 years, and in all that time no care has been taken to modernize the home. This is your chance to modernize it. This kind of home will sell for less, giving you an opportunity to increase its value. Cosmetically ugly and/or dated homes are the perfect project for an investor, as value can quickly be added while building expenses can be kept relatively low.
- Unused garage: There is some debate about whether or not you should convert your garage into a bedroom or leave it as is. This goes back to the reality that your property and your renovations will depend on your goals. An extra bedroom in one of my properties rents for $950 a month at the time of this writing, that is $11,400 a year in income I would not have had had the garage been simply kept as a place to store junk.
- Location: Besides the actual structure of the home, where the home is located is just as important if not more important. The home needs to be nearby to schools, hospitals, downtown, transportation, close to the interstate and other major roads, restaurants, bars, and parks.
- Landscaping: Sometimes all that a home needs to look good on the outside is some bushes and new sod. Consider what you can do to a home to improve its curb appeal. This is the first thing that potential tenants or buyers see when they come to look at the home.
- The cost to fix it: If the cost to fix the property is much more than the value that will be added to it, then the home is a no-go for me. Certain problems are just not worth the hassle, unless of course you can get the home at a steep discount. Keep in mind that things come up during the renovation process, so whatever your contractor told you the work might cost will not be exactly what you will end up paying as the work commences.
- How old the home is: The older the home, the higher the maintenance costs will be. Consider this when two homes are otherwise similar.
- Tax and insurance estimates: When buying a home, it is important to get the cost of insurance and taxes before you sign the contract. Taxes that are too high or insurance premiums that are costly will kill your cashflow, making a potentially good deal an average one and an average deal a failure.
- Potential rent: Generally speaking, a 3/2 will rent for more than a 2/1, unless there are special circumstances, such as location. I calculate rents from the very beginning, before I even put in an offer on a deal.
Depending on your real estate goals, it is wise to calculate rental income over the course of a year, 5 years, 10 years, and 30 years (the term of a 30-year mortgage). Using a rental property calculator, you can calculate your rate of return and your cash-on-cash return to identify and choose between deals which otherwise seem relatively similar.
If you are holding for the long-term, calculate 20-30 years into the future, if you are looking for just a fix-and-flip, then run your numbers accordingly.
The first step to any deal is what makes or breaks the deal. Buy at a good price, and everything else will be easier. Pay too much for a property, and nothing you can do will make up for it.
