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6 Sep 2011

Things to Consider When Buying a Rental Property

I keep a list of things to consider when buying a rental property in my head, before my emotions take over. I have been doing this (though on a small scale) for 10 years but I still get entangled in emotions about what property I buy. You would think I will personally live in the property. In the midst of all those emotions, I tend to forget that a prospective tenant has a mind of his/her own. They may love walls whilst I love to have open spaces. Here is a list that can also help you before you invest:

You are in this for money.  That's the reason you are referred to as an investor. Look at the numbers carefully. How much rental do you want to get? That should be the starting point for any real estate investor. Make some assumptions to get to what you are prepared to invest to get the returns you want. You will need to do some research on where you can invest to improve your chances of getting the rental amount you want.

 Location. Like the agents state, good location will most probably get you the returns you want. Not only that, your location has to be attractive to your target tenant. I always target the young professionals (graduates), or young moms with school age kids. I will invest in a property close to schools, shopping and close to the city. I am not interested to deal with students even though I have friends who are very successful in that market. My take is - a single mom will want to create more stability for her child and not move places as often as a single girl. Being close to schools makes it even tougher for a parent to change locations. I also try to be centrally located, close to shopping places and other community areas like churches. Great location sells the property.

Building Age. If you have a good handyman/ constructor, you may buy an older property. It comes with a baggage of maintenance. The pipes may be tired, structure needing some anti-ageing or face lifts, etc. The are investors who can work with an oldie and give it a curb appeal like it was a new house. If you are not a typical DIYer, or know none, you may have to consider a newer building. Tenants love what is modern and classy. It is relatively easy to get the rental you want with a modern building.

Size.
Remember that you already have a target tenant. Young graduates will most likely be looking for a studio apartment, a mom looking for a second bedroom, a married couple may be looking at a home office, etc. The size of your property also determines how much rent you can charge. I have tried getting bigger properties for rental, which backfired badly. My target market and location is really not for mansions. The bigger houses have not been a success in my case. I stick to 2 to 3 bedrooms.

 Cost of Being a Landlord.  
Yes, it comes with costs. Financially, its never too early too investigate the expenses in the area of choice. Take a good look at the expected annual property taxes, insurance, property maintenance and unexpected repairs. I wrote about my emergency fund, or lack thereof here. A good landlord (not me) has one for some of those irritating things that break unexpectedly. I bought a new water heater, dealt with plumbing that was out of hand and a broken window. It never ends, I know. 
There are homeowner association and property management fees too (if you appoint one). These do add up. The other costs are actually difficult to manage - stress. Dealing with tenants is very stressful. The risk of them not paying on time, or just not paying period, damaging your property, etc can take its toll on your emotional health. Be firm but fair and empathetic. 

That's my list of things to consider when buying a rental property. There are a lot more things to consider, like the risk of owning a property. I assume you have gone past that already and are now shopping around. For me, this is what I love. I am happy that it has returns.

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