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5 Tips for Buying a Profitable Rental Property

Growing Real Estate value

Some of the biggest fortunes in the world were built on real estate, so buying an investment property to include in your estate holdings can be a wise investment. Owning income producing real estate over the long term has proven to be a sound investment for many.

But like any investment you’d make, it’s a good idea to learn as much as you can before committing. You’ve probably heard both good and bad about owning a rental property, but have you ever heard from a true expert?

Property management companies know the ins and outs of rental properties because they operate them day in and day out. With that expertise in mind, here are the top five tips for buying a rental property from a property manager’s perspective.

  1. Ask yourself if you’re cut out to be a landlord

Before investing a single dollar in a rental property, you should think about managing the property. Is it something you’re willing and able to do? It involves advertising for tenants, showing the property, screening tenants, collecting rent, paying the bills, repairs maintenance, and more.

So you should ask yourself if you’re truly cut out to be a landlord. If not, you should hire someone else to manage your property.  Property management will typically cost 7-10% of the gross monthly rent depending on the type of rental.

  1. Pick a good location

The last thing you want to do as an investor is acquire a rental property somewhere that’s on the decline. If school systems are slipping, property values are flat, and the population of an area is dwindling, it’s a good idea to steer clear. You want your property to be in demand, and that means somewhere people want to live.

In the San Francisco Bay Area, that might mean a place like San Jose or Campbell, CA, which is an area where housing is in high demand. This area is expensive, though, so sound property management in Campbell, CA, must include strategies to keep costs down along with retaining good quality tenants so that the property is consistently profitable.

  1. Avoid properties that need major work

It might be tempting to find a run-down property at a discount and restore it into a rental, but that strategy could end up costing you. Every day an investment property is not rented it loses money, so renovations that take weeks or months to complete are actually more expensive than just the cost of the work done.

Unless you’re handy enough and have enough time to do all the work yourself, it usually makes more financial sense to find a property at a reasonable price that needs only minor repairs and can be rented quickly.

  1. Avoid the best or worse house on the street

It’s an old adage in real estate, but when you’re investing, it especially makes sense: Don’t buy the best or the worst house on the street.

The best house comes with the most costs, which eat into your cash flow. The worst house usually cannot fetch market rental rates, a problem that also eats into your cash flow. Remember, too, that a home purchased near the top of the market is difficult to sell at a large profit.

  1. Focus on the numbers

A rental property is purely an investment. The only thing that should matter is whether the numbers work to make it attractive. You might love Campbell, CA, for example, but it’s the right location only if you make enough money.

If the rental income is more than your expenses (annual rental income minus the annual cost of the mortgage, property taxes, insurance, and maintenance), you’re turning a profit. `If it’s enough higher, you might be able to hire a property management company which will free up your time and make it a more passive investment.

You don’t have to be an expert right away, but it helps to know these tips before buying a rental property.

Valley Management Group has been providing trustworthy and affordable property management services in Campbell and San Jose, CA for 40 years. If you own a rental property in San Jose, Campbell or elsewhere in Santa Clara county, contact them for a free property management quote and a free month of property management when you sign up for their services.

Reviewed and Approved by Lloyd Kipp
Property Manager and Owner of Valley Management Group

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