Have you considered investing money into a passive rental for additional income but not sure where to start? This blog post is a peek into how I choose properties to invest in. The number one thing to remember is that picking a passive rental different than choosing a home for yourself to live in. When it comes to investing in a passive rental, it is all about numbers and not about falling in love with the property. Though the analysis is complex, I have broken my strategy down into four key components for simplicity.
Location is key in any real estate investment. For single family passive rentals, this is specifically important in finding tenants quickly and also for retaining tenants which in turn is helpful in reducing the vacancy rates. I look at these specific elements:
a. Access to public transport and expressways
Note that if public transport isn't available and expressway proximity is what you're considering, ease of parking becomes a factor as well.
b. Proximity to schools and major employers
It is much easier to find and retain tenants if the property is close to schools or major employers. This is not only important for renting, but also important in terms of resale value of the property (though it is not considered advisable to base passive rental investment on future appreciation).
c. Specific street or block
A lot of major cities vary from block to block in terms of vacant / distressed properties and crime levels. It is important to visit the property at different times of the day and different days of the week to get a good idea.
This is a minimum percent most savvy investors of residential single family rentals go for. The One Percent Rule states that the gross monthly rent should be at least one percent of its purchase price plus urgent repairs.
For example, a property that costs $80,000 and needs $20,000 in repairs should rent for at least $1,000 per month or a property that costs $200,000 with no immediate repairs needed should rent for at least $2,000 per month.
Websites like rentometer or hotpads are great for estimating the market rent. Make sure you are performing an apples to apples comparison in terms of number of bedrooms, bathrooms and square footage when estimating rent.
The bells and whistles that one may look for when choosing a home do not apply to rentals. Some examples are top of the line kitchen appliances, Level 3 granite, high tech thermostats etc.
There are certain upgrades however, that are smart to add to rentals because it avoids damage to the property and inconveniencing tenants during extensive repairs. A few examples of these are new roof and new windows.
It is important to understand local regulations and federal laws when it comes to real estate investing from the get go. There may be licensing requirements, annual registration or inspections, safety codes, fair housing etc and the responsibility to abide by those fall on the investor.
In a long run passive rentals offer low risk passive cash flow and can be a great wealth building tool - the above four key components though not all-encompassing can give an investor a starting point.