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Looking for rental property?

So, you’re thinking about getting into investment property. If that’s the case, there are a few basic questions you need to ask yourself before you get started. The first one is simple: are you most interested in appreciation on the property or cash flow? If your answer is cash flow, read on.

The concept behind cash flow properties is simple: take in more in rent than you spend to own the property. There is no getting around the fact that, in order to purchase a property that is going to generate cash in your pocket every month, you’re going to have to look at a lot of places and do a lot of research. You could go take a seminar from a “guru” who will tell you that you can get property that generates tons of cash for no money down to make you rich. If this the case, don’t you think he would be running around buying properties instead of giving seminars? Save that money for your down payment.

First, you have to decide what kind of property you want to buy. If you want to enter the rental market game for as little money as possible, mobile homes are worth a look. However, you should keep in mind this isn’t going to yield the most stable pool of renters. Maybe you’ve found a house or condo that you want to rent for a few years then move into when your kids are all off to college. Do you want a single-family detached home, a few condos or town homes, or a multi-unit building? Once you’ve weighed the different options and decided, it’s time to get busy with your research.

Who’s going to manage the property? If you are going to use a property management service, the property can essentially be anywhere. This might be an option if you live in an area with a unstable renter base, for instance, such as if industry is leaving the area and taking jobs with it. If you are going to save money and manage the property yourself, your purchase should probably be local … and you have to be honest with yourself as to whether you can really handle it. If you are a busy executive that works long hours, you may be able to handle one or two properties, but if you add any more you may rethink it. If you’re buying several units and your research shows that you can make a living off the cash, you can do it full time. But don’t underestimate the rigors of property management. When a tenant’s toilet breaks, she’s going to want it fixed today, NOT when you get back from vacation. Weigh the cost benefits. Is the standard 8-10% property management fee worth you having both the benefit of monthly cash flow AND your freedom?

There is usually going to be a trade-off between appreciation and cash flow. An executive home in a nice neighborhood may appreciate rapidly but not generate as much money per month because of the higher mortgage. Conversely, multi-unit structures that generate a lot of rental income every month may not be in the nicest part of town, and therefore appreciate less. And remember the lessons learned from recent market cycles: appreciation is never guaranteed.

Once you’ve decided what you’re going to buy, partner with a real estate agent that specializes in rental and income property. Insist upon seeing the records for any property for at least the past two years before you buy. Look at capital expenditures, rental income, maintenance costs, association fees and any other expenses. A positive balance sheet should ideally be accompanied by reliable, existing tenants.

Investment property can be an excellent way to make money every month from rental income, but don’t kid yourself. There are a lot of factors to consider. Are you cut out to be a landlord? Are you in a position to weather inevitable vacancy rates? Are you able to financially handle major problems like a new HVAC unit or replacing a roof? If so, don’t skimp on the research: start building your rental property portfolio the right way. Patient research, due diligence, the assistance of an experienced local real estate professional are all key to your success. It’s more than just finding what looks like a great buy and closing the sale: it’s everything beyond the sale that determines the cash flow potential of a rental.