While rental properties can be a great way to build wealth, they can also be a great way to build stress. If you are on the hunt for an investment property, it is important that you know what makes and breaks rental properties.
Over many years of buying rentals, rehabbing them, managing them, and selling some of them, cash flow always remains the most important thing for me. Cash flow is how much money you actually get to keep after paying all expenses such as financing costs, taxes, insurance, maintenance, repairs, etc.
Vacancy & Repairs
An ultra common mistake people make is they never budget for or under budget for certain expenses like vacancy and repairs. Eventually something will break and turnover is not as cheap as most people think. Make sure to make an all encompassing, realistic budget when estimating your cash flows.
Too many investors buy properties with deferred maintenance thinking they got a great deal with killer cash flow. When evaluating an investment property, you need to estimate how long a life is left of things such as the roof and A/C. If you cash-flow a very high $500 a month on a single family home but have to replace the roof 2 years in, you will be lucky to break even.
Houses with deferred maintenance and outdated features need to be evaluated accordingly. Large expenses in the near future means less cashflow and you will be need to plan on setting aside a consistent capital expenditure budget.
Location & Tenants
You hear it all the time: location, location, location. I had a rental home in a gated community in Pasco county once that was very nice. Before renting it, it sat vacant for 2 months while we tried to find qualified tenants. Put that same home in Tampa and it is gone in less than a week.
Better neighborhoods mean it will be easier to attract qualified tenants because you will have lots of applicants. When buying in a low income area, you need to have a much higher vacancy budget as turnover can be more common and take longer.
Remember that tenant selection is extremely important. It a great neighborhood, it is easy. In an undesirable neighborhood, you sometimes have to settle for what you can get.
When you are ready to start looking for your next investment property, get connected with an agent who is also an investor. Call today or contact us online to get started.
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