One of the tested means of generating cash flow in real estate investment is through owning rental properties. Rental properties enable a real estate investor to enjoy not only capital appreciation on their property but also the opportunity of earning income regularly. Many investors have used this type of assets as a retirement plan that could fund their lifestyle after they stop working actively.
To own multiple rental properties could also position you for access to finance whenever you desire to purchase another investment property. Passive but regular income from these properties will position you to access loans.
While the above advantages make owning rental properties attractive, there is a need to understand factors that a real estate investor should take note of in order to avoid some potential downsides. One of the critical factors to watch out for is location. A bad neighbourhood can rarely give you good tenants. If the property is situated in a neighbourhood that has a high crime rate, dilapidated infrastructures and very low-income earners, it will generally not attract good tenants who work in good places and can afford reasonable rents. Good tenants not only pay good rents they also pay on time.
Assessing the location should involve some level of projections. Is the location going to benefit from population growth, industrial development, infrastructural projects and property appreciation? If for instance, the major reason for the growth of the area is as a result of one industry, consider what could happen if there is a downturn in that sector. You should be interested in multiple factors that are fueling the growth of the area in the long term and will continue to provide a steady stream of tenants for your property.
If you intend to use bank funds to finance the purchase of this property, then you should carefully consider if the income that this property will generate will be enough to pay for your mortgage. If the amount cannot take care of your monthly repayment cost, then the property has a negative cash flow. This simply means that you have to pay more than you earn. This is not the ideal position to be as an investor. A negative cash flow property is doing the opposite of what you should have as an investor. It is taking money out of your pocket instead of putting money in your pocket.
When negotiating the purchase of the property that you intend to use for this purpose, some of the issues that you need to check with the seller or the property manager is the rental history of the current tenants.
If the major reason the seller has decided to sell is because tenants have refused to pay rents or they pay irregularly, beware. This should not be a deal breaker if you know what to do and you are prepared ahead.
This may require you evicting all the current tenants or most of them in order to start anew but knowing what you are up against will prepare you for the long haul.
It is important for you to assess the state of the property that you intend to buy and use as a rental property. One of the reasons why most properties command low rents is the state of repairs or the absence of certain facilities. You may need to factor this into your cost. You should also factor in the vacancy time during which you will carry out the required renovation or maintenance work.
During this period, you are not going to earn any income from the property but once the property is upgraded it will likely command a good rent. It will also attract a pool of potential tenants thus increasing your chances of getting a quality tenant.
In order to attract the right set of tenants, you need to carry out a comparative market analysis of rent in the neighbourhood. This is a comparison of similar properties based on number of rooms, facilities available, services provided and year of construction.
A newly-built or recently renovated property will command more rent but if the rent is significantly outside a particular range, such a step could be counter-productive.
It is better to have tenants who pay regularly rather than accept those who are only committed in their minds to paying the initial rent but must be pressured to pay subsequent rents.