There are many good options, but one of the best ones—as investment properties go— would be single-family rental homes. Single-family rentals are in high demand, putting out record numbers of renters on the market. There are also several additional benefits. These include long-term residents and the ability to appreciate over time. But there are also difficult parts about owning rental properties, and probably the most difficult part would be finding a great bargain in an expanding market. However, before you move forward and purchase that rental property in Frederick, especially if it seems too good to be true, it’s important to ask yourself six key questions.
1. Why is the home listed at the current price?
A good deal on an investment property often starts by finding properties listed below market value. But there may be a cause for that low price, and that reason is more important than the good bargain that’s being given. Check the property carefully to make sure there is no hidden damage or that there is no need for major repairs. Unless you purposely are going to invest a large sum of money into fixing it up, you’ll want to avoid a property like this. Anything spent making the property habitable must be factored into your rental margin, so why the property is underpriced matters.
2. What is the state of the local real estate market?
No matter where you’re thinking to purchase a rental property, you have to know the neighborhood and local market first. You’ll need to figure out how many houses nearby are rentals, what the average rental rate is for properties similar to the one you have in mind to buy, and if those rates have gone up or down recently. Crime rates, nearby amenities, access to public transportation, the local job market, and more are also important aspects of a rental’s location. The best locations tend to have a moderate number of single-family rental homes that have relatively low market values but comparatively high rents.
3. What is your expected rate of return?
Along with a rental’s location and price, you need to calculate a potential rental property’s rate of return before making an offer. The rate of return, or capitalization rate, may have variations depending on the area, but it commonly falls between 4% and 10%.
To calculate for the capitalization rate for a potential investment property, get your net operating income (rent minus expenses) and divide it by the home’s sale price. Don’t forget to include additional costs like property taxes (which you can get from the county assessor’s office), Association fees, and any extra insurance required if the home is located in an area prone to natural disasters.
It would be wise to keep total expenses to about 50% of the gross rents – this is known as the 50% rule. If the property you were thinking of buying doesn’t offer a good return, don’t go for it. There are multiple properties out there waiting for you to find them.
4. Are there ways to quickly increase the value of the property?
In a competitive real estate market, bargain properties can be difficult to find. This is where being creative and having a vision can help. Real estate investors can take a look at the deals that others have passed on and still see quality rental homes. To do that you just need to add value to a property.
For example, let’s say a house has only one bathroom. You can add a second one to up the value. Upgrading the interior would also work, replacing it with modern flooring or new appliances. Some houses have dens, sunrooms, carports, or other areas that can be converted to increase the property’s total square footage. The renovation wouldn’t be expensive and can be done quickly. By applying this, you are adding value to your rental property, and that can give you the positive cash flow you want.
5. Does the property fit into my niche or area of expertise?
One novice mistake is being quick to purchase a property in Frederick. Sometimes new investors see what seems like a bargain and they buy it. Others have a certain self-imposed deadline for their next purchase and are forced to get a property that really isn’t a good deal. But there could be problems that would arise if you purchase a bargain property that’s outside your expertise or if you feel compelled to buy despite seeing clear warning signs.
It’s smart to develop a deep understanding of one niche or segment of the market so that when something that seems like a great deal comes up, you can be better equipped to determine whether or not the deal on that investment property is too good to be true. In the same way, having patience is also important, especially in this industry of investing in rental properties. It’s crucial that you wait for the right deal to come along.
Even though everyone seems to be buying now, that does not mean you should follow them. Be sure that whatever prospective property you have, it fits your goals and area of expertise. Common investing mistakes can be avoided by that one simple tip.
6. Who will manage the property?
Profitable rental property investment is also one that appreciates over time. To ensure that your property continues to grow in value, you need someone to manage your property for you. That someone must be trustworthy and an expert in that field. If you have the time and skills to handle your property yourself, you’ll also need to make sure that you can be called on for any midnight emergencies or repairs.
If you’d rather have someone else handle the management or if your rental property isn’t in the same area as where you live, then you’ll need to get the services of a property management company. Find one that understands your investment goals. Professional property management companies like Real Property Management have grown to become a reliable, nationwide resource for rental property owners like you.
Don’t be too hasty to buy that rental property in Frederick. Instead, see to it that you have the best and most recent information available. Real Property Management Metro offers a free rental property assessment. This can help you make the best-informed decision. Make use of this valuable resource by contacting us online or calling us at 410-290-3285
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