HOW TO: Select a Profitable Rental Property

Posted on May 18, 2007

I have been looking into rental property quite a bit since there is so much housing inventory for sale in my area.  After multiple years of being a seller’s market the tides are turning, and buyers have the upper hand.  Prices have not dropped dramatically but have leveled off and many sellers are accepting lower than asking price.  After doing a lot of research on selecting the right rental property here are some tips I have picked up along the way:

  1. Compare rents in the area.  Use a tool like RentOMeter to gauge the median rent in the area.  Check Craigslist and compare typical rent for that area, as well as the amount of inventory that is for rent in that area.  Proceed with caution if a seller says you can raise the rent once you take over.  Why did they not increase the rent if it was possible?
  2. Compare prices of rental properties.  This seems to be standard now with the ease of searching properties on sites like realtor.com.  Check zillow to get an estimated valuation of the property.  Keep in mind zillow is just an estimate.
  3. Normal is good.  My point here is to pick a property that has a broad appeal to many tenants.  You do not want something that is so unique it will only appeal to a specific demographic.
  4. Ask for records.  If the owner is renting the property currently, ask to see the record of income, expenses, and occupancy for as far back as they can show you. 
  5. Check maintenance needs.  Be cautious if a significant amount of maintenance has been put off.  The sellers income and expense records could show a misleading return if maintenance has been put off for years.
  6. Check violations of local code.  You do not want to call a lawyer to get you out of this one.  Make sure the seller has pulled permits for all upgrades or construction that has been done on the property.
  7. Ensure seller turns over tenants’ security deposit.  When you close on the property all tenants’ security deposits should be turned over in the transaction.
  8. Keep your monthly payment affordable.  If a vacancy occurs you will have to float the mortgage so make sure you have enough in savings to cover it until its filled.
  9. Scrutinize the current leases.  You will want to know who the tenants are, how long they have been there, and how much time they have left in the lease.

Anyone that currently owns or has owned rental property please leave comments and suggestions on selecting the right property. 

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    » Filed Under How To, Rental Property

    Comments

    4 Responses to “HOW TO: Select a Profitable Rental Property”

    1. Q at $1 Million to My Name on May 18th, 2007 1:16 pm

      Yay for rental properties. Great post - owning an apartment building is a great foundation for your portfolio. I would highly recommend it.

    2. Carnival of Personal Finance: 101st Edition - Plus6 …a personal finance blog on May 22nd, 2007 1:45 am

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