Buy Rental Property with this Guide
As a real estate investor, you will come across properties that are on rent. In fact, some of your clients may end up asking you how they can get ahold of the rental properties. Now, what most people don’t realize is that buying rental property is more or less the same thing, with a few key differences.
Real estate courses teach specific strategies, mostly concerned with generating higher cash flows for your business, increasing your chances of getting better tenants, and lastly, get the most profits when you close your deals. All of this is equally valid for when you’re dealing with rental properties.
I’ll be laying out the strategies on how to buy rental property successfully, hopefully educating you on some key differences to look out for.
Guidelines to Follow
Are there any specific things in particular that you look for when buying a property? More importantly, do guidelines like these change your perception of your business?
Guidelines matter, and so do certain key factors. Let’s take a look at some general guidelines that work for everyone.
Keep an Eye on the Numbers
Your primary concern with real estate investment should be to ensure an adequate cash flow for your business. This means that you need to look at the numbers thoroughly before you can close any deal. If you are looking to purchase a property to sell it down the road, doing a lease purchase, holding on a place until it shows signs of appreciation, then you need to work the numbers. A classic mistake that most people who are just starting out in the world of real estate investment, make is to agree to the first deal they see, without as much as going through the ramifications of the sale. This is because they feel that they made a good deal, without bothering to check the financial bottom-line. And they regret it later.
To know how well your monthly cash flow is, try considering plugging your numbers into cap rate equations or cash-on-cash return. If you have cash left over after all expenses are accounted for, then congratulations, you have a positive cash flow.
Watch Out for Market Fluctuation
Now that you know the importance of number crunching before closing any deal on buying a rental property, prepare yourself for the inevitable – sometimes these calculations may not pan out as you planned.
The reason behind this observation is simple. The market is subject to fluctuations. Sometimes the market may react favorably to your rental property, helping you make good windfalls in the process. The reverse is also true. In such a case, you have to consider asking yourself if you would be able to handle the ups and downs of your market.
Cash Flow is Relative to Risk
There are some investors out there who believe that you need to aim for a certain number as part of your monthly cash flow. But since we are dealing with a rental property here, it might not be ideal for every other one.
Let’s take an example. Suppose you buy a property for $100,000. The property in question is not that risky, and $200 is attainable as a cash flow goal. But if you were buying a property with a lot of risks attached for, let’s say $700,000, having a cash flow of $200 seems like a no go.
In such cases, you need to look at how high the risk is with the property. The higher the risk, the more higher cash flow needs to happen. More risk equals a bigger cash flow. However, you will have to aim for more than just a number here when you consider our monthly cash flow. You need to look at the tenant, the nearest macro market’s condition, the risk, for starters.
To conclude, these are just a few guidelines that you need to review before opting for a rental property. Follow them well and you may not see your finances going all awry due to any unforeseen circumstances.