What are the factors to consider when buying property that will be used as a rental?

Asked by Samir Lakhani, Seattle, WA Mon Feb 6, 2012

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Rob Armstrong’s answer
Rob Armstrong, Other Pro, Seattle, WA
Sun May 13, 2012
Hello Samir-

That's a huge question, there are a lot of factors to consider. In general, you may want to walk through potential investment properties from a "Profit and Loss" approach, meaning, draft up an income and expense statement and plug in all the figures as accurately as possible:

Income (rents and/or utliities)- Do research for the area around the property for like kind/size/condition properties to determine likely rental rates you can expect.

Mortgage, property tax, insurance- you'll have these figures from your financing information
Maintenance costs- is the property in poor, fair, good or excellent condition? How old is the furnace, water heater, and appliances? You'll want to estimate the annual costs you'll likely encounter in operating the property. You'll also want to include the first years costs or getting the property rented-will it need paint, carpet/flooring or other items in order to market it effectively?
Utilities- using your own information or other mwans of estimating how much the utilites will cost per month.
Other- what other expenses might you forsee with a given property (lawn mowing, HOA dues, etc etc).

Using this will give you an idea of how the property will operate finaicially, and can also help you compare different properties to determine which might be a better rental investment.

Best of luck, and if I can be of any help, don't hesitate to contact me directly!
Rob, RD House real Estate & Property Management, Seattle
Web Reference:  http://www.rd-house.com
0 votes
Tribeca NW R…, Agent, Issaquah, WA
Mon Feb 6, 2012
As an investor, landlord, and real estate broker, I recommend you talk to people that own rental properties, talk to your accountant and talk to an real estate attorney. Owning rental properties is not for everybody, but if you have what it takes, this is one of the best ways to build wealth and cash flow. There are so many factors that can apply. The obvious one is how much can you buy it for, what improvements need to be made, what kind of rent can you get and how to find quality tenants? The whole idea of owning rental properties is to buy something that will appreciate while others payoff the debt.

If you have not already, the first step is to find a qualified Mortgage and Real Estate Broker who understands first hand how to identify and finance an investment property, analyze the acquisition, capital cost and capitalization cost. Once you have a property identified, make and negotiate an offer that fits within your predetermined analytics. Buying a investment property should not be emotional and you need to be able to walk away if your numbers do not fit! There are more properties. Next you need to do a thorough inspection to determine the condition of the property. This is the best spent money! Five factors to consider; Foundation, Roof, Heating, Plumbing and Electricity. These are all the big ticket items that can make a great acquisition a poor one. You can still purchase a property that have these issues, but you need to take into consideration the cost and that should reflect your offer and bottom line. You can usually get a good buy on a property that is in need of some differed maintenance... It will help significantly if you know or you can get referred a quality contractor who can provide references, meet time lines and stay under budget. A bad decision on who to use as a contractor can once again make a great acquisition a poor one...

Once you own the property, you will need to find quality tenants. I personally do not recommend a property manager unless you do not speak English, you plan on moving to a different state or you will own more than 4 rentals. You should not buy a property that you can not get to within a hour. A property manager will collect 7-10% to collect the rent and field phone calls and that affects your cap cost and bottom line. You may need a Real Estate broker to help you find tenants and you will have to pay commission.

There are a couple of resources that you can find to determine a good neighborhood. There are websites where you can find out current market rents, crime rates, and the names an proximity of sex offenders. Keep in mind, you are buying an investment property and you are not going to live there. I am not as concerned about neighborhood as I would be concerned about finding a quality property that will attract quality tenants who will pay full market rent that cash flows. If you are not prepared to deal with people and there problems, owning rental property may not be a good fit.

Once again, buying and owning investment property is very rewarding and a great way to build wealth and generate cash flow. Buying and owning any kind of real estate has legal and tax implications. It is imperative to do your homework and find qualified professionals who understand this market. Seattle area is a great rental market.

visit http://www.costello-costello.com


Jeffrey A. Costello CRS CNE ABR CDPE CIAS
Coldwell Banker Bain

"Never forget: the secret to create riches for oneself is to create them for others."

-Sir John Templeton
2 votes
Ray Akers, Agent, Seattle, WA
Sun May 27, 2012
Income from the property. Maintenance costs. Appreciation. Resale. Those are the top issues for any investor. However, those are not the only issues you should consider. You should also pay attention to crime, neighborhood trends, local jobs, and convenience for you. Is the property located near to where you live so can easily make repairs or monitor the property? Is there a stable rental/jobs market which provide a pool of solid tenants? Is the neighborhood desirable? Is the crime rate high? Are rents stable? There are a number of factors which investors must consider. Each property will be different. Purchase price is not the only consideration, and may be among the least important considerations in the long run. Do your homework and honestly evaluate every property and you'll be a wiser investor.
0 votes
marcia h cha…, Other Pro, kirkland, WA
Wed Feb 8, 2012
samir... If you are considering rental property, you need to determine what you can afford and include added expenses which may occur i.e. repairs, remodels... check the location to see what rentals are going for or meet with a professional re: area & rents....i am a leasing consultant/property manager and specialize in taking on only individual properties and clients rely on the expertise of a professional especially if you have never owned real estate...
0 votes
Keith & Kins…, Agent, Verona, WI
Wed Feb 8, 2012
Make absolutely sure the property has positive cashflow. Income (rent) - expenses (mortgage, taxes, repairs, insurance, vacancy, etc) must be in the positive. I've seen too many investors bank on appreciation and fail.

A few other key factors, try to buy in a neighborhood that will attract quality tenants and be easy to manage. The properties I manage myself perform much better than the properties that I have a manager.

Here's 5 more tips for investing http://wp.me/p1dbYY-3I

Also, check out our blog (below) we have a few examples about our own rental properties. Good luck!
0 votes
Arron Renfrew, Agent, Seattle, WA
Tue Feb 7, 2012
Nothing else matters accept YOUR GOALS. If you are clear on your goals and find property to meet those goals you will be golden!! I manage 125 doors with specific goals in mind. Would be glad to chat. Arron Renfrew 206-779-6600...Remember...if you do not know what to do with your money...someone else will!! Goals and Clarity are everything!
Web Reference:  http://www.renfrewre.com
0 votes
Bill Eckler, Agent, Venice, FL
Tue Feb 7, 2012
Of course....location, location, & location....

With that said, purchase price, overhead, rate of appreciation, type of renter(student, seasonal, annual) etc. are important considerations.

Best wishes,

0 votes
Jirius Isaac, Agent, Kenmore, WA
Mon Feb 6, 2012

You have some good answers below already. You will want about 25% down to get the best investment interest rate. You also want to figure out what that house in that neighborhood will rent out for & compare that to your total payment. You also probably want it somewhere close to you or on a route that you take daily.

But, the most important thing is to discuss these & all the other issues with your own buyers agent. Do not try & do this yourself. I would suggest, that as a buyer, you Google every agent that responds to your question here on Trulia, learn as much as you can about who they are online, read their client testimonials, so you know what their clients are saying about them, and then give us each a call and just ask us why we think you should work with us instead of another agent. This will take you a little while to do, but will be time well spent, as choosing the right agent is the first step towards choosing the right home. Then, pick the best fit for you and let them go to work for you with the skill and knowledge that they have. I hope to hear from you soon. By the way, I am both a real estate broker & a loan originator & can help you with the whole process.

Jirius Isaac
0 votes
Karen Mcknig…, Agent, Kirkland, WA
Mon Feb 6, 2012
Hi Samir,

That is a big question. For starters, I recommend a book, The Millionaire Real Estate Investor by Gary Keller. There are organizations that teach classes on investing. An investor client of mine is taking the Kiyosaki (the Rich Dad Poor Dad author) real estate investing course and is pleased with what she has learned.

One of the most important considerations is learning how to analyze the return on investment. I do have a speradsheet for that and use it with my clients. Contact me if you'd like and we can talk about the process of investing.
Web Reference:  http://www.karenmcknight.com
0 votes
O.J. Marston, Agent, Edmonds, WA
Mon Feb 6, 2012
I think another factor to be aware of is the neighborhood and what type of tenants it will attract. It will also determine the amount of rent you can charge. Obviously the more bedrooms, the more rent you can expect.
Also, are you handy or do you have to hire someone for all the possible repairs to be done. Factor that into the amount you may need to set aside every month for unexpected repairs needed that you won't be able to do yourself. Also, do you want to manage the rental yourself, (find the tenants, receive rents, do the walk through, and evict if needed) or do you want to hire a property manager to handle the tenants for you. They usually charge 7-10% of the rents received for their fee every month.
I agree with Collen below. Look at the house and determine issues that will need to be addressed prior to renting the house out or that will need to be done in the next few years.
0 votes
Colleen Fisc…, Agent, Chelan, WA
Mon Feb 6, 2012
Potential cash flow which should take into consideration vacancy factors, any HOA fees, Management fees (if not self-managing), and on-going maintenance. What is the property's condition? How soon will the major components need attention or replacement? Roof, heating, plumbing? Zoning, deed restrictions. And one thing I see many investors forget to consider (because they are looking more at purchase price) is layout and overall appeal of the property. The more tenants it will suit, the more likely to find a strong tenant at a fair price. Good luck!
0 votes
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