Buying an investment property to rent out to tenants comes with no guarantee of seeing a return on investment. However, selecting the right property and following industry best practices will help you acquire a real estate investment that generates income. We’ll discuss how to buy a rental property and how to make improvements that add value to your properties.
What You Need to Do When Buying an Investment Property to Rent
It can be very difficult to know if rental properties are a good investment and whether a few fixes around the property will be worth it in the long run. The following scenario is just one example of the research required for commercial property investing. Take a moment to picture this:
You find the basic details of a listing, including the price of the property, rent price point, expenses, a drone video and virtual tour of the property. By just looking at the listing, you have almost all the initial information you need to know this could be a great property to invest in. You schedule a tour of the building, and as you walk up to the building, the broker hands you a report with more details about the property, along with information about comparable properties in the area. The report features a range of practical data points that confirm your initial assessment about the property being a great investment, and there are even recommendations about where you can add value!
Imagine the report gives you information like this: A property in close proximity recently sold for $15,000 more because it had a brand new boiler system installed. Directly next to this fact is a cost break-down for replacing a boiler system. The report tells you that in your area, it costs around $10,000 for a new boiler system. With this information, you know you will be able to immediately add $5,000 in value by replacing the boiler system at this property.
The report might also tell you that another similar property nearby is earning lower rents per square foot, but perhaps that property has laminated countertops. The property your considering has granite countertops, so it’s able to achieve $10 more in rental income per unit per month.
This is the power of data. And with continuously improving data collection techniques, reports like the one described above will be the standard in a sales transaction within 10-15 years — if not sooner!
Of course, this is just a story, but it gives you an idea of the extensive research and information gathering that goes into a purchase before deciding if you want to invest in a rental property. As a buyer, seller, owner, real estate agent or lender, you must rely on data like this, and it would be smart to start tracking the data you have now.
How can you do this? Simply look for data and record it! Here are some data collection tips for aspiring rental property owners:
- Every time you see a property for sale, whether it’s a sales brochure or an offering memorandum, keep the information.
- Save documents in a file, and create a spreadsheet to record data points.
- Utilize public records — tons of data is readily available online.
- When a broker sends you an update on what is happening in the market for rents, sales, occupancy, etc. keep the information and add it to your data spreadsheet.
- Utilize these data points to enhance your knowledge of your own property or properties, and pay attention to the overall market.
- Soon, you’ll be able to find and recognize patterns in the market.
As you’re collecting and storing data, don’t get lost in the weeds. Data is abundantly available, but not all data points will have an impact on the overall market, a particular sale or your bottom line. Once you get started, it will be easier to see which data points are most crucial to your success.
How to Invest in Rental Property Step 1: Do Your Research
The amount of data available can seem overwhelming when you’re buying an investment property to rent. As you begin browsing real estate listings, start with in-depth research as demonstrated in the story above. Some things to consider while you’re collecting data about a property:
Collecting Real Estate Data From Listings
When you find a multifamily property listing that seems promising, the listing itself will provide large amounts of helpful data, like number of units, square footage and historical information about past sale prices and taxes. However, some information is not easily accessible on online listings. You’ll need to reach out to an agent to arrange a tour in order to see property details like fixtures, finishes and potential subtle signs of damage or neglect
Collecting Real Estate Data From Agents
If you’re interested in a multifamily listing that’s missing things like interior photos or other important information, reach out to the listing agent. No question is off-limits. An agent will be able to answer your questions and/or schedule a tour so you can see the property for yourself.
Collecting Real Estate Data From Property Tours
Seeing a property with your own eyes is often the best way to figure out if it will be the right investment for you. Take notes when you tour a property. Keep an eye out especially for things you could easily upgrade in order to add value, attract more tenants and increase rent prices to earn more income. Here are some examples of easy opportunities to add value to a property:
- Replace old, outdated appliances
- Remove or refinish worn-out flooring
- Install new, efficient heating/cooling systems
- Replace the water heater
- Upgrade the countertops
- Utilize smart technology, like a digital thermostat
- Upgrade windows
- Add simple, attractive landscaping
If you’re looking for a few improvement options that are less costly than replacing major property items, start with a quick, fresh coat of paint and a few new light fixtures, and you’ll be on your way to adding value to your property. These types of upgrades can be very easy and inexpensive while making a positive impression on potential tenants. Also consider what home design features are currently trending, like electrical sockets with USB ports or fixtures with matte finishes. Adding a few modern details can be a big selling point without breaking the bank.
How to Invest in Rental Property Step 2: Crunch Some Numbers
If you view a property that needs some upgrades, don’t let that scare you away! A multifamily rental property that needs renovations can be a very wise investment, but just like our example listed above, it’s important to figure out exactly how much value you can add to the property with upgrades, how much those upgrades will cost upfront and how long you’ll have to wait before you see a return on investment.
Some upgrades will be very expensive but will increase property values exponentially, while some renovation projects may not be worth it in the long run. As you consider what to upgrade, consider both tenants and future buyers.
This part of the research process can be tricky, but there is a lot of data available if you’re willing to take the time to look for it. It’s essential to be accurate while making these calculations, so don’t forget to consider the following multifamily rental expenses:
- Price of materials, fixtures, appliances, etc.
- Labor costs
- Taxes and insurance
- Property management
- Ongoing maintenance costs
Are Rental Properties a Good Investment?
There is no simple answer to this question. The future of your success in the multifamily housing real estate industry depends on data collection. Savvy real estate investors collect data and analyze market trends to make strategic decisions about real estate purchases. In order to see ROI, you’ll need to study information from third-party sources and historical data. The more you know about past trends, the more you’ll be able to accurately predict future patterns in the commercial real estate industry.
In short, if you collect data, study the market and create a smart strategy, buying an investment property to rent out can be very profitable. If you jump in without doing the right research, you can easily end up wasting money on a poor investment.
Learn More About How to Invest in Rental Property in Des Moines
That’s why we’re here to help steer you in the right direction. Contact us or reach out to Jared Husmann at 515-334-4900 if you have any questions about how to buy a rental property, or view our commercial property listings if you’re ready to get started.