Criteria for Purchasing Rental Property

Written by FrugalTrader on Jul 5, 2007 filed under Real Estate

Any real estate investors out there? I started in the whole real estate game when I graduated from University in 2003. My wife and I bought our current primary residence in the summer of 2003, and our first rental property not long after.

Let me just tell you that being a landlord is like having a second job, and not always fun at that! I’ve had to deal with all kinds of tenants - from very good to insanely bad. The type of tenant that you pick to live in your investment will make a world of a difference. Point being - be picky over your tenants.
Anyways, back to the point of the post, my criteria for purchasing rental property. I have some set rules that have to met before I purchase an investment property.
These rules include:

1. The property must be cash flow positive.
• Find out what the market rent is for the area, you can typically find this through real estate agents, other real estate investors, or simply by viewing the rental listings in your newspaper.

• Subtract this by the expected expenses with the rental property. Some expenses include: Mortgage, property/water tax, insurance, maintenance, vacancy, and property management costs.

• Your CASH FLOW must be positive from day one.
• If you live in a very expensive housing market and rents don’t cover the mortgage, then I would suggest not becoming a landlord. It simply doesn’t make sense to purchase a property in the “hope” of appreciation. It will only be a matter of time before the property will suck the life out of your own cash flow.

2. Nice neighborhood with low vacancy rates relative to the rest of the city.
• From my experience, it is ideal if you own a house in a nicer neighborhood because you can charge higher rents with lower vacancy rates. I have also found that nice houses attract nice tenants.

3. I prefer houses that are in good shape and move in condition.
• I’m personally not the handiest of people (getting better), so I would prefer houses that don’t need a lot of work. I don’t mind buying home that need minor cosmetic changes (paint, cleaning etc), but no major work.

4. I prefer to buy houses that are under market value.
• You all know that I’m frugal, so I always look for a deal whenever I buy ANYTHING. Housing is no exception.

• Ways to find houses under market value - landlords who are sick of being a landlord, houses that need cosmetic work, pre-foreclosures, foreclosures, and listed houses that have been on the market for a while. I could go on and on about this topic, but that is beyond the scope of this article.