Rental Property Tips and Guidelines
Many people come to me asking about the best strategies to buy 1-4 multi-family unit rental properties. We have specific strategies in our course for creating higher cash flow, getting substantially better than average tenants and generating much higher profit when selling down the road. However, when it comes to buying rental property in general, I tend to give the same guidelines regardless of the type of real estate investment it is. When you’re a real estate investor, there certain things to look for in a property. Guidelines do matter, and there are certain factors you should be looking for when you go property shopping. For property investors who are new or seasoned, there are three guidelines I think are quite valuable to follow as you go about your property search.
The Numbers
As a real estate investor, you want cash flow, and to get adequate cash flow going, you’ve got to know the numbers inside and out before finalizing any deal. Whether you’re purchasing to re-sell, fix-and-flip, lease purchase, or hold on for the long haul to obtain appreciation, work the numbers well. Too many people go into deals assuming they’ve landed a great deal but barely run any numbers. All too often they end up without the profits they were anticipating, because they didn’t add up all the numbers. There are cash-on-cash return and cap rate equations that you can plug the numbers into to see how well the monthly cash flow may be. You want positive cash flow, meaning you have cash left after all the expenses have been paid.
Market Fluctuation
You know that you must crunch the numbers when deciding on whether to purchase a rental property, but those number calculations don’t always execute as planned. See, the market may influence how well your property does. If the market takes a dive, then your calculated numbers may not end up as you predicted. Will you be able to sustain those initial numbers? Will you be able to handle market fluctuation? Your Cash Flow Is Relative to Risk? Some investors will tell you that you should aim for a certain number for monthly cash flow. However, that amount may not be ideal for every rental property. For example, if you purchase a multi-family for $100K, and that property is not very risky, $200 cash flow seems like a reasonable goal. However, if you are buying a property for $800K, and the property is a bit risky, $200 cash flow is not good. The higher the risk of the property, the higher the cash flow ought to be because of that added risk. So, you must consider more than just a number to aim for regarding monthly cash flow. What’s the risk involved? How is the tenant pool? How’s the nearest market doing?