3-Step Rental Property Investing Strategy
If you are just starting to get into rental property investing, the first thing you must do is to formulate a strategy. There are 3 main steps to do this:
â¢ Determine your objective and time horizon
â¢ Determine your targeted property type
â¢ Determine your target area
STEP 1: DETERMINE YOUR OBJECTIVE AND TIME HORIZON
The first consideration is your objective and time horizon, both of which go hand-in-hand. Are you looking to turn a quick profit by holding the property for 1 year and then flipping it? Or is your objective to build long-term equity by holding and renting out the property?
Really, the only thing to consider here is your access to capital, which includes cash on-hand as well as access to non-bank loans. Unless you have access to a lot of capital, or you are operating in a white-hot real estate market, youâll probably find it difficult to execute a short-term flip strategy because you must factor in holding and selling costs.
STEP 2: DETERMINE YOUR TARGETED PROPERTY TYPE
Next, you must choose your preferred property type. You can be a real estate investor in a variety of ways, but for âsmall timeâ investors 2-4 unit multi-family properties generally make the best choice. This is because rental income tends to be substantially higher by virtue of having multiple units, yet overall expenses are only slightly higher than, for example, a single-family home. Plus, you will avoid commercial status as well as the extra inspection scrutiny that properties with more than 4 units must deal with.
Usually, old properties (50 or more years old) in older neighborhoods offer the most value. Additionally, youâll want to focus on properties with multi-bedroom units. Not only do 2-3 bedroom units command more rent, but they also tend to have a more stable tenancy compared to 1-bedroom units.
STEP 3: DETERMINE YOUR TARGET AREA
The third key factor to determine is where you will purchase your rental properties. Youâll want to focus on a town or a county that is no more than a 30-minute drive from your home. Anything farther than that is too difficult logistically and will consume too much of your precious time. I also recommend focusing on areas that are upper-lower class, as properties in these areas are relatively cheap, tenants are plentiful, and the âclienteleâ is better than middle-lower class areas so management is less stressful.
The best way to find your target area is to grab a map and drive through all the towns within a 30-45 minute drive from your house. As you drive around, look for lower-tier neighborhoods that are âin transition,â where houses are being fixed up and property values seem to be rising. Stay away from areas in complete disrepair.
This driving expedition should allow you to narrow down your choices to just a couple of towns. You can then look at multi-family listings within each area (use a site like www.realtor.com) and compare the list prices with those in other, nearby towns to get a sense of the affordability of investing in that specific target area.
PUTTING THE PIECES TOGETHER
Thatâs all there is to it. To sum up, the overall strategic framework is as follows:
â¢ Determine your goal (monthly income, retirement, etc.), and how many properties you must acquire to achieve it. Plan to hold and rent each property for at least 10 years.
â¢ Pick an upper-lower income town or county no more than 30 minutes from your house.
â¢ Look for 2-4 unit non-owner occupied older rental properties with multi-bedroom units.
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