Are you looking at your first investment property? Maybe you're considering adding another property to expand your business.
Either way, be aware that not every property is a good property for your rental investment portfolio. It's tempting to add a cheap property to grow to the next level. It's also appealing to skip a few steps to snag a deal that's going fast. As a landlord, you need to be strategic about how and when you add a new property to your portfolio. How do you know if a North San Diego property is a good investment? Follow these guidelines.
It's Yours—But Not "Yours"
You'll own your next investment property. However, you won't live there.
Approach an investment property differently than you would approach the search for your own personal home. Your private home should have all the amenities you want and need to enhance your life. When it comes to buying a rental property, think like a renter and a business owner.
What do renters want in a home? What are desirable features for renters without putting too much money into the house?
- Look for a minimum of three bedrooms and two bathrooms. Homes with only one bathroom or two bedrooms are less appealing to renters.
- Pass on homes with granite counter tops or expensive features throughout the property. You'll overpay for the home, and you won't be able to recover your investment through the rental price.
- Choose a good location. Even if you wouldn't live in that neighborhood, is it tenant-friendly?
- Avoid older homes. Newer homes require less repair and upkeep. You'll get a newer home on the market faster than an older home that needs renovations.
DIY renovation television shows highlight the charm of older homes when updated for modern living. Those homes are great! However, the work and expense they require cause older homes less than ideal for rental homes.
Run the Numbers
Do your market research to determine if the home is worth the investment. Compare to other similar homes on the market.
- What are the recent sale prices of a few homes?
- How high are property taxes?
- Can you set a rental rate that attracts quality renters while also giving you a profit?
- How many rental properties versus owner properties are in the area?
Apply the One-Percent Rule when calculating the cost of the home against what you could charge for monthly rent to make a profit.
Take the purchase price of the property, add any additional estimated costs for repairs to get the home ready for rent, then multiply by one percent. The total of that formula is your base level for setting the monthly rent.
For example, if the home value plus repair costs equal $125,000, your minimum monthly rent should be $1,250 (or one-percent of your initial estimated costs for the property). Can your market support a rental at $1,250 per month? If so, you could be looking at an excellent investment property. If not, keep looking for a better property.
Look For Red Flags
Some properties will show you the signs of a bad investment. They might look good on paper or online. However, when you arrive for a showing, you'll see warning signs.
- If a property has been on the market for a long time, proceed with caution.
- If the realtor or owners are slow to communicate or answer specific questions, walk away. They could be withholding critical information about the home to make a sale.
- If the price is much lower than it should be compared to other properties in the area, investigate the reasons for the low price. Someone could be trying to unload a lemon.
This property is an investment, not a rescue operation. Look beneath the surface and don't be afraid to dig deeper. Get an independent inspection to find any underlying foundation issues or hidden problems that you should avoid.
Consult Professional Advisors Before You Make an Investment
As with any investment, use professional advisors before you sign paperwork or hand over a down payment.
Consult a property management company. Your best North San Diego property managers will know the market area and what makes an excellent rental property. Raintree Property Management can review the numbers and any property you have your eye on. We'll make recommendations on your first—or your next—investment property.
We work hard to make sure your rental properties are profitable for you. That starts with choosing the best properties for your portfolio.
Contact us when you're ready to buy your next property! We offer a FREE Rental Analysis to find out what the property is worth and how to price the rent. With that information, you're on your way to your next successful property. Click the link below for your free analysis!
