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With the rental market reporting record-breaking rental rates and low vacancies nationwide, it’s no surprise that everyone is thinking about getting in on the action.
A new study from the Mortgage Bankers Association’s Research Institute for Housing America noted an increase in owner-occupied homes transitioning into rental properties. Now, more buyers are purchasing properties as an investment to take advantage of the hot rental market.
Inexperienced investors or first-time buyers look to brokers and their agents to help them analyze whether a property will be profitable. If you want your company to be the go-to source for clients seeking a solid rental property investment, then you’ll need to understand a property’s potential.
Identifying Profit
Ideally, an investment property should produce a 6 to 8 percent return. This means monthly rental income should cover an investor's mortgage payment, property expenses (insurance, taxes, and maintenance), and operating expenses (utilities, software, or supplies), leaving an investor with at least 6 to 8 percent left over as profit.
While a buyer might be tempted to purchase an older house with an enticing list price, you need to remind your clients that upfront costs will affect the profitability of his or her investment. For this kind of property—or a newer property that needs work—it’s a good idea for an investor to bring a contractor along to get a firm estimate of renovation costs. Add renovation and closing costs to your purchase price to calculate the client’s upfront investment.
“When purchasing an investment property, you should have a minimum of an 8 percent return on your investment after all initial expenses,” says Nathan Miller, who works with more than 13,000 landlords at Rentec Direct. Let’s say you invest $50,000 into a property up front, including expenses such as the down payment, closing costs, and initial repairs. Then, after all regular monthly expenses, planned maintenance, and a budget for unplanned maintenance, you should, in this case, have a $4,000 annual profit, he says
Advise your clients to budget for long-term scheduled maintenance, including painting the property every 10 years and roofing it every 25 years. “These are expensive tasks and need to be in your annual budget,” says Miller. A budget for emergencies and unplanned maintenance, such as a failed furnace or broken water pipes, is also important.
Know the Market
Beyond the actual purchase price and expenses, an investor needs to consider the local rental market of the property. Vacancy will kill the profitability of a property quickly, so you should help your buyer understand if and when the property will generate enough rent to hit that 8 percent profitability.
Check out information on the local rental and vacancy rates. If your buyer sees an online rental ad, which he or she uses to base a potential asking rent on, but the area has a higher than average vacancy rate, your buyer could have a hard time finding a renter and may have to lower the rent to a lesser amount.
Consider the Property
A good investment property should be a place where renters actually want to live. That might mean forgoing the inexpensive listing with rundown fixtures in favor of one with newer features in a higher-priced neighborhood. Single-family rental homes tend to experience more wear and tear than owner-occupied homes, so it’s beneficial for a buyer to consider durable newer features that will require less maintenance.
The most sought after features by renters include location, access to parking, square footage, and in-unit features like a washer and dryer, dishwasher, and other appliances. Brokers and their agents should encourage buyers to consider properties that include these key features in order to maximize renter desirability and potential profit. Remember, the better the property, the better quality tenants your buyer will have, which can mean less work and less money down the road.
