Every industry has its adages. In the real estate world, it’s “Location, location, location.” In the investing world it’s “Buy low, sell high.” To coin an adage for the world of real estate investing, we recommend, “Buy low in the right location, earn money every month from your investment, then sell high at the right time.” Okay, it isn’t catchy, but it captures the essence of how buying a great rental property can produce income today and reward you with a tidy profit down the road.
Is investing in rental real estate risk-free? Absolutely not. But the risks are manageable and the rewards can be great — especially compared with other investment options these days — if you make smart decisions along the way.
Many markets around the country today offer unparalleled opportunities to purchase good-quality, low-priced properties in very desirable areas. Data indicates, however, that home prices across the nation are going up. Buying an investment property now helps ensure your investment will appreciate in value as the housing recovery takes hold.
Short sales and foreclosures are especially great options for investors who can afford the extra time it can take to close a deal. These types of properties — along with others that need repairs, updating or cosmetic changes — are frequently sold at prices well below market value. Of course, you’ll likely need to spend some money rehabbing your investment, but doing so judiciously could yield a property that will eventually sell for many thousands more than your total investment costs. And before selling, you’ll earn income from rent payments to help repay your costs.
Today’s extremely low interest rates can also mean you spend less acquiring rental property. By leveraging a mortgage for part of the purchase price, you can free up cash for making improvements to the property or for other investments — and take a tax deduction for your interest expense. Again, rental income could cover some, all or even more than your mortgage payment.
Maximizing your income from a rental is all about keeping it rented at a reasonable price. That means purchasing a home in an area where renters want to live — safe areas near transportation options, employment centers, good schools, shopping, restaurants, entertainment, etc. A useful guideline: Would you want to live there?Buy a rental property that’s in short supply. Perhaps there aren’t enough single-family rentals, units with three bedrooms, rentals with more than one bathroom, properties with off-street parking. Owning one of the rarer rental types in an area could be a gold mine.
People will pay more to live in a home with great amenities that are in great condition. Like any other type of customer, renters are naturally attracted to the best value. If your rental is nicer than others, you’ll be able to charge more for it and you’ll have fewer/shorter vacancy periods.
Due diligence is required when considering who you want living in your property. Ask applicants to allow you to run a credit and background check on them. Request references from previous landlords. Look for public records (convictions, etc.) using any of a number of online services; the peace of mind you gain will be worth the relatively small fee. Be sure your lease is legal, solid and addresses issues important to you, such as late payments, subletting, parental guarantee for students, smoking, property care, appliance use, noise, overnight visitors becoming co-tenants, maximum occupants, late vacate notice, etc. Require sufficient deposit against damages — first/last advance rent. Charge extra for renters with pets, or when offering other added perks (extra storage or parking, bundled utilities, Wi-Fi/cable/Internet, etc.). Conduct periodic inspections to ensure your renters are taking care of the property.
Eventually, you will want to cash in your investment and use the proceeds from the sale for something else — college tuition, retirement living expenses, another investment, etc. Ideally, you’ll walk away with a nice profit — in addition to all the income the property has put in your pocket over the years.
Of course, you can’t control what the local real estate market is doing. You can, however, time your sale to take advantage of improved property values (benefitting you) and affordable interest rates (benefitting buyers). In addition, you can ensure your property is in tip-top condition when it goes on the market.
If you are selling as an investment property, you may be able to get a higher price if it comes with resident renters who are under long-term lease. Buyers will be attracted to the instant cash flow the property promises, and they’ll find it easier to obtain a mortgage loan by being able to show current and projected income. In fact, your property is likely to sell for more if you’ve been able to keep it rented at a good price.