Buying a rental property
Buying a rental property is easy. Buying a rental property and making a good return is quite a lot harder. So in this blog post, we’re going to give you a few tips on how to buy smart.
First identify your market
First, do your research to identify a market that gives good returns. If you’re buying rental property, your main criterion is likely to be the cap rate or rental yield – rental income less charges as a percentage of the price you pay. That will depend on the location of the property – 4% or less in New York, 8% or more in Nashville, for example – and it will also depend on the type of property.
Then, you need to get to know that market in depth. What kind of property rents out best? What’s the balance between owner occupiers and renters? What are the demographics – are you renting to families, retirees, young professionals? What does that imply for the best type of property to buy, and how to present it? For instance, if you want to rent to families, then you’re going to be looking at properties with gardens, not small flats. Are certain streets more expensive than others? Is there a major development happening that could raise property prices in the area? You’ll want to get an idea of property prices, but you’ll also want to get a feel for rental levels. It can be a good idea to ‘mystery shop’ rental properties to see how they’re presented.
Searching on- and off-market
Having identified the type of property you want, and set down a budget, you can start looking. Zillow is a good place to start, but use it to identify the right agents, rather than just to find properties. You’re looking for agents who regularly get the type of property you’re interested in. Make contact with them, discuss your requirements, and ask them to let you know if they have anything that fits the bill. That should get a flow of good potential deals coming your way, even if you don’t strike lucky with the first one or two you visit.
But look off-market as well. Some investors do well by driving round looking for signs – ‘for sale’, but also ‘for rent’. If the sign’s up because yet another tenant has moved out unexpectedly, the landlord just might be willing to let the property go at a good price rather than go through the hassle of getting a new tenant.
Buy below market price
Always aim to get a property at 10% or more below the market price. This is when you can lock in an advantage – you’ll rarely be able to sell for 10% above the market price, after all! Regard the asking price as merely useful information; work out from the rental levels and any work needed on the property what it’s worth to you as an investor. If it’s priced above that level, tell the agent what you think it’s worth – you may be lucky and have your offer accepted, but at worst, you’ll get kudos for being honest.
On the other hand, you could consider investing in a REIT. You’ll still need to do a bit of work checking out the business and working out the best combination of dividend yield and potential price appreciation for your portfolio, but buying a REIT doesn’t involve realtors, lawyers or driving around the neighbourhood for weeks looking for the right property. You’ll get a stake in rental properties that might include commercial as well as residential, giving you broader diversification, and you can build your wealth just as well as with a real estate purchase.