As investment properties go, there are plenty of opportunities you can choose from, but one of the top choices would surely be the single-family rental home. There is high demand for single-family rentals since this investment has been churning out record numbers of renters on the market. There are also other advantages you can get. These benefits include long-term residents and the ability to appreciate over time. The most daunting part when it comes to rental property ownership might just well be finding that great bargain in an expanding market. However, don’t pull that trigger just yet, especially if a deal seems too good to be true. Before you purchase a rental property in North Hollywood, it’s important to ask yourself six key questions.
1. Why is the home listed at the current price?
A good deal on an investment property often starts by finding properties listed below market value. But the fact that the price is low may mean that there is a reason behind its price. Knowing this reason is more important than the bargain pricing. Carefully check the property to makes sure it doesn’t have any hidden damage or needs major repairs. Unless you were looking to invest a large sum of money into fixing it up, you’ll want to avoid a property like this. Anything spent making the property habitable must be factored into your rental margin, so why the property is underpriced matters.
2. What is the state of the local real estate market?
No matter what location you plan to purchase a rental property, you need to do adequate research on the neighborhood and local market first. You’ll also need to know if there are other rentals nearby, and how many. You should find out what the going rental rate is for properties like the one you want to get, and how have those rates been trending— whether they have gone up or down recently. Crime rates, nearby amenities, access to public transportation, the local job market, and more are also important aspects of a rental’s location. The ideal investments are in locations that have a moderate number of single-family rental homes with relatively low market values but comparatively high rents.
3. What is your expected rate of return?
Along with a rental’s location and price, you need to calculate a potential rental property’s rate of return before making an offer. Although it changes from place to place, the rate of return (or capitalization rate) normally falls between 4% and 10%.
To figure out the capitalization rate for a potential investment property, calculate your net operating income (rent minus expenses) and divide it by the home’s sale price. Don’t forget to include the expenses on top of the selling price. Include the property taxes (which you can get from the county assessor’s office), Association fees, and any extra insurance required if the house is in an area prone to natural disasters.
The best practice would be to keep total expenses to about 50% of the gross rents – this is known as the 50% rule. If the property you were hoping to buy doesn’t offer a good return, just leave it. There are multiple properties out there waiting for you to find them.
4. Are there ways to quickly increase the value of the property?
In a competitive real estate market, sometimes it’s quite difficult to find bargain properties. This is where real estate investors can put in some creativity and vision, because there are some quality rental homes that others may have passed up but are actually a good deal. You can do that by adding value to a property, and there are many ways to do that.
For example, let’s say a house has only one bathroom. You can add a second one to up the value. Upgrading the interior would also work, replacing it with modern flooring or new appliances. There are homes with dens, sunrooms, carports, or other areas which can be converted without great cost or time. Converting it would increase the property’s total square footage. By updating and converting the rental property, you are adding value to it. This added value would translate to the positive cash flow you want.
5. Does the property fit into my niche or area of expertise?
One of the biggest novice mistakes is getting a property in North Hollywood just because there seems to be a bargain. New investors also unnecessarily rush themselves by deciding on a certain deadline for their next purchase. But there may be a lot of problems you’ll encounter if that bargain property isn’t in your field of expertise, or if you feel pressured to go on with the purchase even though you’ve seen clear warning signs.
It would be prudent to develop a deep understanding of one niche or segment of the market. This way, when a great deal on an investment property comes up, you can make the judgment call whether or not it’s too good to be true. In the same way, having patience is also important, especially in this industry of investing in rental properties. It’s crucial that you wait for the right deal to come along.
Just because everybody seems to be buying now does not mean that you should follow the herd. See to it that your prospective property matches your goals and field of expertise. This will help you avoid many of the common investing mistakes.
6. Who will manage the property?
Great rental property investment is also one that appreciates over time. To make sure that the property keeps on growing in value, you need a professional who is trustworthy to oversee the property. If you have what it takes to manage the property yourself, then the next thing to check is your time availability. This jobs requires you to handle midnight emergencies or repairs.
If you’re more comfortable having someone else do the management, or if your rental property is far from where you live, then you’ll need to get a property management company that understands your investment goals. Professional property management companies like Real Property Management have grown to become a reliable, nationwide resource for rental property owners like you.
Don’t jump into purchasing that rental property in North Hollywood without first making sure that you have the best and most recent information available. Real Property Management West San Fernando Valley offers a free rental property assessment that can give you the data you need to reach the best decision for you. Take advantage of this offer by contacting us online or calling 818-727-0100.
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