I am frequently called by clients who find that they are able to purchase a little investment property to diversify their portfolios. Many of them have very little idea as to what they should be looking for and what to expect. Many folks think that there are cute little gems just hiding around the corner waiting to be snatched up. Truth is, that may have been the case 5 or more years ago when homeowners were walking away from their homes due to the recession. And even at that time, there were major corporate investors buying up bargains by the truckload as they knew that the economy would eventually come back. In the meanwhile, these houses were given a little TLC with some paint and carpeting etc and then rented out. Many of these investors had a business plan to hold these properties for 5 years and then to sell at a good profit. Many of the houses on the market at the low end, fall into this category now. So, are there any "bargains" out there? Very few, unfortunately.
But let's pretend that you want to find one, because your mom told you that you were always lucky.
The science of good investing is rather involved but I'll hint at some of the issues that you may want to consider.
Firstly, how much do you want to spend and what type of return do you expect on your money?
Well, let's back into it. Assuming that you have about $200k cash to kick around and you want about a 7% return on your investment. That means about $14k a year that stays in your bank account. So let's assume that your taxes are about $2k p.a. and insurance about $1k p.a. and let's anticipate about $5k p.a. for maintenance - thats for painting and sometimes carpeting etc when the tenant moves after a year. We are also assuming that you are going to be the Property manager so you don't have to pay someone else to collect the rent and send a plumber over there in the middle of the night.
So what are we looking at in terms of charging a renter? Remember that you want to hang on to a net 7%. That means that we have to add the expenses back. If you do that, it looks like you will need to rent the property for a gross of approximately $22k per year. (BTW most individual investors will share with you that they invariably lose money on their first investment property).
So will the market bear that? That's approximately $1830 per month for a $200,000 house.
Depends on the area of town. Some of the areas that I am familiar with will support that, but it is marginal. A $200k house will generally command a rental of approximately $1500-$1700 pm.
So how does one make it work then, you may ask? Aah, the trick is to pay $200k for a house worth about $250-$275k and then you can get that rental !!
Of course this has been a very simplistic example so the trick is to know the market really well, or have a hot-shot agent who does, and who is prepared to take a lot more of his/her time to find that property for you. I personally would make it worth their while financially to help you as they are forfeiting time that they could spend with other buyers who don't have such tight parameters.
And then there is finding a good renter, and there my friend, I wish you loads of luck!!!