INDIANAPOLIS, IND. (STL.News) – Buying an investment property requires numerous steps. “There are about 180 steps just to buy a home, but a lot more to consider when buying an investment property,” said Rankin, who has been a real estate agent since 1996.
For those considering taking the plunge and entering the rental business, Rankin lists these following six tips:
No. 1: Familiarize yourself with maintenance work.
This is imperative as regular and annual maintenance costs tend to be high and can cut into one’s profit if they have to call someone else to do repairs. “If you are not handy at all, being a landlord is probably not the thing you should get into,” stressed Rankin. “Property maintenance can include anything from regular lawn care, fixing a toilet and patching a hole in drywall, to painting, remodeling a bathroom/kitchen, cleaning, and much more.”
No. 2: Find a property in your neighborhood, or within 10-15 minutes away.
This will make it convenient should you need to do get there quick. “If it will be a hassle to get there, or you have angst each time a tenant calls, you should not have bought in that location,” noted Rankin. “Another option is to pick an area you are familiar with and buy all your properties in that area.”
No. 3: Determine your return on investment (ROI).
An easy and quick measure of whether it will be a good investment (at least on paper) is figuring the Cap Rate (Capitalization Rate of return). “Do this by taking the yearly rent and divide by the purchase price,” advised Rankin. “For an older home that will need more maintenance, if this is not at least 10%, stay away; i.e., $1,000/month rent = $12,000/year; purchase price is $120,000, 12,000/120,000 = 10%. For newer homes you could go as low as 8%, because the maintenance items should be less. The only reason not to follow this rule is if the price for a property is so good, you should consider it. One thing to always consider is what the value of the home will be down the road. It might be worth buying it now, even if the rent is not that great now, but has good upside to get more rent, or that the value of the home down the road will increase your equity position fast.”
No. 4: Offer cash.
Cash is king when purchasing a rental. “If offering cash, you can negotiate the price more and close quickly, or as soon as title is free and clear,” added Rankin. “Obtaining a line of credit, or a Home Equity Line of Credit (HELOC) against your current residence, would allow you to pay cash and free up any money for updates.”
No. 5: Buy a duplex.
I am a huge proponent of buying a duplex first,” stated Rankin. “This is what I did. You can live in one side and rent the other side out. The rent can potentially cover your mortgage payment, or most of it. Once you move, you now have 2 sources of rent.”
No. 6: Find a property where you can add extra bedrooms.
This can include adding a bedroom in a basement or an attic. “Don’t just look at 3- or 4-bedroom homes when looking for a rental. Also, look at 2-bedroom homes with a basement/attic, then determine if you can add a bedroom or 2, and possibly a bathroom,” concluded Rankin. “This will add more value to a rental property than renovating the kitchen, for example. It will also increase the appraised value greatly, and, best of all, 2-bedroom homes will be less expensive to purchase.”
About Terry Rankin, Century 21 Scheetz
Terry Rankin works with both buyers and sellers. He specializes in first-time home buyers and investors, new construction and development, urban and in-fill properties, commercial and industrial properties, rugby player and coach relocation, estate properties, waterfront and golf course properties, and vacant land. Terry is a Quality Service Pinnacle Producer and recipient of numerous sales awards. For more information, please call (317) 507-4250, or visit http://www.terryrankin.com.