As investment properties go, there are plenty of opportunities you can choose from, but one of the top choices would surely be the single-family rental home. Single-family rentals have record numbers of renters on the market, making it an investment with high demand. There are also additional benefits, including long-term residents and the ability to appreciate over time. There are, however, some challenging areas when you’re planning to own rental properties. The most challenging of all is probably finding a great bargain in an expanding market. However, before you move forward and purchase that rental property in Bridgewater, 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 cause for that low price, and that reason is more important than the good bargain that’s being given. Carefully check the property to makes sure it doesn’t have any hidden damage or needs major repairs. Unless it’s your plan from the beginning 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 what area you plan to purchase a rental property, you have to be well versed with the neighborhood and local market first. You’ll also need to know if there are other rentals nearby, and how many. You should find out what the going rental rate is for properties like the one you want to get, and how have those rates been trending— whether they 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. The best locations tend to have a moderate number of single-family rental homes that have relatively low market values but comparatively high rents.
3. What is your expected rate of return?
Along with a rental’s location and price, you need to calculate a potential rental property’s rate of return before making an offer. Although it changes from place to place, the rate of return (or capitalization rate) normally falls between 4% and 10%.
To calculate for the capitalization rate for a potential investment property, get your net operating income (rent minus expenses) and divide it by the home’s sale price. Make sure to include the incidental expenses such as the property taxes (which you can get from the county assessor’s office), Association fees, and any extra insurance required if the property is in a location 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 were thinking of buying doesn’t offer a good return, don’t go for it. There are so many properties out there that will give you a better deal.
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 having a vision and some creativity to achieve that vision really helps. There are some deals that other real estate investors may have passed up but can actually be turned into amazing rental homes. You can do that by adding value to a property, and there are many ways to do that.
For example, you can upgrade the interior with modern flooring or new appliances or place a second bathroom in a unit with only one. There are some houses that have dens, sunrooms, carports, or other areas. You can quickly and inexpensively convert these areas to increase the property’s total square footage. By updating and converting the rental property, you are adding value to it. This added value would translate to the positive cash flow you want.
5. Does the property fit into my niche or area of expertise?
One beginner mistake that some new investors make is to purchase a property in Bridgewater without studying it closely. They may think they’ve found a bargain or perhaps they’re pressuring themselves with a certain deadline for their next purchase. But there could be some issues that the bargain property you get is not part of your field of expertise or if you are compelled to ignore clear warning signs in order to make a purchase.
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.
Just because everybody seems to be buying now does not mean that you should follow the herd. Be sure that whatever prospective property you have, it fits your goals and area of expertise. Common investing mistakes can be avoided by that one simple tip.
6. Who will manage the property?
A great 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 have what it takes to manage the property yourself, then the next thing to check is your time availability. This job requires you to handle midnight emergencies or repairs.
If you prefer to have the management handled by someone else or if your rental property is located far from your home, then you’ll have to hire a property management company that will work toward 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.
Before you make the decision to buy a rental property in Bridgewater, you should be sure that you have the best and most recent information available. Real Property Management NJ Elite offers a free rental property assessment. This can help you make the best-informed decision. Make use of this valuable resource by contacting us online or calling us at 908-955-7487 today.
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