Investing in Real Estate

What should a real estate investor look for when purchasing their next rental property?  These tips are good for any market, although I wrote them based on purchasing investment property in Flagstaff, AZ - a college town with a focus on tourism.

Cash Flow: It may seem obvious, but the most important factor in purchasing your income property is to work the numbers. Will this property contribute to your bottom line? Your cash on cash return determines the answer to that question. That is not determined by the market value of the property, but rather how much cash came out of your bank account to purchase the home. For example, if your rental income less expenses equals $200 per month, you are earning a positive cash flow of $2400 per year. If you used $40,000 as your down payment, your cash on cash return is 6%.

Determining Rents: Looking at the market value of rents for similar properties in the neighborhood is your best determining factor. As a real estate investor myself, I use a general rule of thumb to determine if the property is a good investment value. If the rents I can charge are a minimum of one half of one percent of the purchase price, the property passes my first-look test to determine if I am even interested. If I can get anything more than .5%, it has potential to be a great rental property.

Diversify: As with stock portfolios, it makes sense to diversify your real estate holdings as well. My husband and I own rental properties in both Flagstaff and the Valley. We have diversified by purchasing single family homes, townhomes, and condos in one or both markets.
Owning in more than one market, or at the least more than one neighborhood, can help you minimize risk over time. When one area has an issue that is out of your control, it can effect rentability.

If you’re just getting started in the investment property market, it can be a good idea to start with a vacation home that you rent out as a short-term rental when you’re not personally using it. If you decide to use this strategy, be sure to know local laws and ordinances regarding short-term rentals. This can be a solid strategy to help you get started in owning an investment property while also helping you gain personal enjoyment from your investment as well.  Check out these Top 5 Tips for purchasing a vacation rental.

Tenants: When purchasing rental property in a college town, the closer to campus you are the more likely you will need to rent to students. Make sure you are well covered in insurance and that you have clearly stated policies and penalties in your lease regarding any issues you want covered. Are you going to allow pets? If not, what is the penalty if a tenant does move in with a cat or dog that is not a certified assistance animal?

When evaluating tenants in the beginning, it’s important to know how to read a credit report. It’s not just about their FICO score. How many late payments do they have, and is it with more than one creditor? Were there special circumstances that went along with late payments or charged off amounts? Are those circumstances still a factor? Sometimes your best tenants don’t necessarily have the best credit scores.

Flagstaff is a great market for real estate investors. Right now, rates are still incredibly low and more financing options have opened up to investors over the past year. We continue to see appreciation in Flagstaff at a healthy pace, and most economic experts are predicting that trend to continue. If you’re wanting to jump into the real estate investment market, or expand your portfolio, now is the time.