Investing in Real Estate has produced many of the world’s wealthiest people, so there are plenty of reasons to think that property is a sound investment. However, as with any investment, it’s better to be well-versed before diving in with hundreds of thousands of dollars. Arm yourself with the information below before starting a new business as a real estate investor.
1. Set the Correct Rental Price
- Your main income for rental properties is the rent you collect. Therefore, make sure you estimate and establish a fair and attractive price so that you can rent the property right away.
- Take into consideration the comparable estimates that will give you the real rental value of your property.
- When comparing estimates, pay attention to the properties that have rented rather than those that are still available. If you don’t have access to this information in your market, I recommend seeking the advice of a real estate agent. It is KEY to price your rental property correctly right from the beginning. Trying to rent $100 above market value can make the property go months on end without being rented, which can generate major financial losses in the long run.
2. The Market for Rental Properties Is Not Directly Related to the Market for Properties for Sale
- We commonly hear from clients that they want to raise the price of rent because condominium expenses have risen, or because repairs have been made, or simply because the value of the properties has risen. However, what the tenants pay isn’t directly related to the owner’s expenses. Those prices are directly related to the supply and demand of the current market in the specific community, sub-community, or building.
3. Consider Renewing Leases
- While it’s true that there are several elements that must be taken into account when renewing a tenant’s lease, renewing is usually the best decision from a financial standpoint. Renewing will help you avoid the following costs:
- Property improvements, repairs, or maintenance to place the property back on the market (painting, cleaning, replacing carpets, etc.)
- The time to find a tenant, pre-select them, negotiate a lease, and the implementation phase. This often translates into weeks or months with no revenue.
- Creating a new lease might have greater fees than renewals.
4. If You Have a Good Tenant, Keep Them!
- One of the most delicate elements of rental properties is the property owner’s relationship with the tenant. If the tenant pays on time, keeps the property in good condition, doesn’t constantly complain about minor repairs and you don’t receive complaints from the neighbors or the condominium, then they are an excellent candidate for renewal, and you should keep them happy.
- It’s common for owners to insist on raising the rent. Why risk losing good tenants just to increase the rent a few dollars? Remember, before risking losing a good tenant, keep in mind that you never know how good your next tenant will be.
5. Evaluate the Tenant.
The following are some aspects to consider when evaluating whether an applicant will be a good tenant.
Proof of income. Request proof that demonstrates the applicant will be able to cover the rent. This includes things such as:
- Latest pay stubs or income receipts (W2 or 1099)
- Latest tax returns
- Bank statements
Credit report. Request a credit report to see how they’ve paid their bills in the past. You can use the following matrix to help you make a decision:
- 579 and below (bad) the lowest 20% of the nation
- 580 to 669 (average) below the nation’s average
- 670 to 739 (good) nation’s average
- 740 to 799 (very good) top 40% of the nation
- 800 or more (excellent) highest 20% of the nation
The following are important criteria to assist in determining if the tenant is well qualified to rent:
- If the person is a foreigner and doesn’t have a social security number, they will not have a credit report.
- If the person has been evicted, which can be determined by doing a background check.
- Police report. Knowing the applicant doesn’t have a criminal background gives you peace of mind. Getting a police report is not difficult.
- References from former property owners where the applicant has lived. It can be a letter. The person can also provide this information on the application, including the owner’s phone number, so you can call and ask for references. Although phone references give us important feedback, also remember that, if your property is in a Condo Association or HOA that also approves tenants before allowing them to move in, the person will also go through another filter, giving you double protection.
Bottom Line
If you are debating on purchasing an investment property, we would love to help you getting started on your investor journey.
