As investment properties go, there are many options you can choose from, but one of the best would be the single-family rental home. Single-family rentals have record numbers of renters on the market, making it an investment with high demand. They also have other pluses, like long-term residents and the ability to appreciate over time. But there are also difficult parts about owning rental properties, and probably the most difficult part would be finding a great bargain in an expanding market. However, before you move forward and purchase that rental property in Paramount, especially if it seems too good to be true, it’s important to ask yourself six key questions.
1. Why is the home listed at the current price?
A good deal on an investment property often starts by finding properties listed below market value. But there may be a reason why it’s listed at that price, and knowing this is more important than scoring a good bargain. Do a thorough check on the property to ensure that there are no hidden damages or any need for major repairs. Unless it’s part of your plan to invest a large sum of money into fixing it up, you’ll want to avoid a property like this. Anything spent making the property habitable must be factored into your rental margin, so why the property is underpriced matters.
2. What is the state of the local real estate market?
No matter where you’re thinking to purchase a rental property, you have to know the neighborhood and local market first. Some of the things you need to look into are: how many houses nearby are rentals, what the average rental rate is for properties similar to the one you want to purchase, and whether the rates have gone up or down recently. Crime rates, nearby amenities, access to public transportation, the local job market, and more are also important aspects of a rental’s location. Ideal locations usually offer a moderate number of single-family rental homes that have quite low market values but comparatively high rents.
3. What is your expected rate of return?
In addition to making sure the rental you want to buy has a good location and price, you should also calculate a potential rental property’s rate of return before making an offer. The rate of return, also known as the capitalization rate, depends on the location, but it often falls between 4% and 10%. To make well-informed investment decisions and explore professional property management services, consider reaching out to Mexpat Realtors, who can assist you in maximizing the potential of your investment property.
To get the capitalization rate for a potential investment property, calculate your net operating income (rent minus expenses) and divide it by the home’s sale price. Remember to include all costs on top of the sale price; things like property taxes (which you can get from the county assessor’s office), Association fees, and any extra insurance required if the property is in an area prone to natural disasters.
It would be wise to keep total expenses to about 50% of the gross rents – this is known as the 50% rule. If the property you have your sights on doesn’t offer a good return, give it a hard pass. There are a whole lot of other properties out there that offer better deals.
4. Are there ways to quickly increase the value of the property?
In a competitive real estate market, bargain properties can’t just be found everywhere you look— it’s just not that easy. This is where real estate investors with vision and creativity can be a step ahead because there are good deals out there that others may have passed up but actually have the potential to be great rental homes. To get that good deal, you can add value to a property, and there are a lot of ways to do that.
To illustrate, you can upgrade the interior with modern flooring or new appliances. That would increase its value. You can also add a second bathroom if the house only has one. Some houses have dens, sunrooms, carports, or other areas that can be converted to increase the property’s total square footage. The renovation wouldn’t be expensive and can be done quickly. What this does is add value to a rental property. This additional value can bring in the positive cash flow you need.
5. Does the property fit into my niche or area of expertise?
One big mistake that new investors usually make is to buy a Paramount property because the price is low. They may think they’ve found a bargain but that isn’t always the case. Another thing that may rush new investors is by imposing on themselves a certain deadline for their next purchase. But there could be problems that would arise if you purchase a bargain property that’s outside your expertise or if you feel compelled to buy despite seeing clear warning signs.
It’s smart to develop a deep understanding of one niche or segment of the market so that when something that seems like a great deal comes up, you can be better equipped to determine whether or not the deal on that investment property is too good to be true. Similarly, holding out for the right deal is an important part of investing in rental properties. When it comes to this type of investment, patience is indeed a virtue.
Even though the people you know seem to be buying now, that doesn’t mean that it would be good for you too. Make certain that any prospective property helps achieve your goals and fits in your specialty area. This will help you steer clear from the most common investing mistakes.
6. Who will manage the property?
A successful rental property is also one that appreciates over time. To ensure that your property continues to grow in value, you need someone to manage your property for you. That someone must be trustworthy and an expert in that field. If you do have the skills to do what it takes, then you have to ask yourself if you have the time. You need to be sure you can handle any midnight emergencies or repairs.
If you’d rather have someone else handle the management or if your rental property isn’t in the same area as where you live, then you’ll need to get the services of a property management company. Find one that understands your investment goals. Professional property management companies like Real Property Management have grown to become a reliable, nationwide resource for rental property owners like you.
In Conclusion
Don’t be too hasty to buy that rental property in Paramount. Instead, see to it that you have the best and most recent information available. Real Property Management Southland offers a free rental property assessment that can make your decision-making process so much easier. Make use of this valuable service by calling us at 562-372-7722 or contacting us online today.
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