First things first! Go Shopping! There are literally hundreds of properties on the market in your neck of the woods that would make suitable homes to live in but you have to learn how to speculate when looking for profitable rental properties. Find out how much you can afford to spend on an investment property by first speaking to a loan officer at a bank (usually this depends on your credit history and how much money you’re willing to put down for your down payment). Once you have this number in mind you need to narrow down your search by putting in your price range parameters. Looking for houses online is probably the fastest and easiest way to get an idea of which houses you want to take a closer look at. You need to pre-screen the houses that you see online. Try to realize just how much work (if any) you are willing to put into fixing up your rental property. You generally can get better deals this way than by purchasing a property that is immaculate. Remember you are not shopping for yourself.
Once you have narrowed down all the houses that are up for sale by your price budget and by pre-screening them online it’s time to contact a real estate agent and ask them to show you the houses on your list. Once you get inside the houses make notes about what needs to be repaired or upgraded and try to use that as bargaining power when you are starting to negotiate the price of the house. (I never pay the asking price of a house).
Once you have found the best house for your budget and feel like it’s better than all the others that you’ve pre-screened (by price, area of town, condition, crime rate), then you need to do the math. This is the most important part of the process. If you purchase a property that cannot support itself then you are making a terrible mistake. You need to figure out just how much you can expect to rent out this property. Ask around! Talk to real estate agents that deal with investment properties and speak to other landlords. A few seasoned landlords can tell you exactly how much you can expect to make in rent from your property. But don’t ask just one. After you get a general idea of how much you “think” the property will rent for go ahead and subtract 10% of the monthly rent just incase the property doesn’t rent for that amount each month.
Next, figure out how much the monthly mortgage will be on the property. Get your real estate agent to find out how much your annual taxes and insurance will be for this property and also what you’re looking at for utilities each month (water, electricity, gas). Add up all of the monthly expenses (even the utilities just incase you have a tenant that wants you to pay the bills each month) and write down this total. Now add 10% to it for safe measure.
Now it’s time to figure out if your property will cash flow or not. Take the total amount of monthly rent that you ended up with in step 3 and subtract the final monthly expenses that you came up with in step 4. This should paint you a close picture of how you’ll look each month if you decide to go through with your purchase. Now multiply this number by 12 to get the annual income (the Net – what’s left over). If you’re rental property is not AT LEAST $200 in profit after you do the math then move on to your second choice property. You will need this minimum $200 each month in the case of repairs & vacancies. Hopefully you will have a nice profit margin from what you bring in to what you pay back each month. You will need to set up your own “repair fund” that you deposit a portion of the rent to each month for problems down the road and also a “vacancy fund” incase you cannot get someone in the property right away or they break the lease early.