When it comes to real estate investing, buying rental property in Los Angeles County offers many benefits. Consider rental property as diversified holdings beyond anything that stocks and bonds can offer for returns, even as a passive investment. There is little management required daily by the owner, and the ROI is immediate with the rental income.
Your first difficult task will be finding a good deal on a rental property, and it can be a challenging task. Make the wrong choice, and you could end up with a bad rental property and a financial loss. For a beginning, real estate investor, go with a turnkey rental property and rent for renters. Suggested must-haves for that turnkey rental property are:
- Residential property
- Fully refurbished or new construction
- Located in a growth market
- Produces a positive cash-flow
- Has the potential of good appreciation
Following Ten Tips For Buying That First Rental Property
Mel Wilson & Associate Realtors can help you get through the real estate guesswork, and we'll start by offering the following ten tips for buying that first rental property:
1. The Best Rental Properties Are in The Best Locations
The first rule of real estate is “Location, Location, Location,” and that rule will remain the most important rule if you want real estate profitable. Don’t get focused on one property until you have considered and researched the following:
- The crime rate for that area
- Location and rating of schools
- The nearby amenities like parks, restaurants, supermarkets, and transportation
- The rental property market for the area and comparable rents
- The area’s economic development
- The future of the locality and is it on the way up or out
2. Choose the Right Market
Your investment goals and the rental that you’re considering should meet those goals. For example, if you want immediate cash flow, you need a stable market, not a market that fluctuates up and down because their growth will be slow. The population, the job market, and the local industries impact the local real estate market. A growing market is one that is booming.
Our picks in Los Angeles country are Porter Ranch, Northridge, and San Fernando. However, there isn’t any guarantee that these markets are going to prosper as you’re hoping. Next to location, timing is essential when it comes to buying rental property. The rule of thumb is to buy when it’s a buyer’s market and sell when it’s a seller’s market. For newbie real estate investors, pairing up with an experienced real estate agent is essential in knowing when it is one of those times.
3. Use Leverage When Buying Rental Property
When you understand the mortgage market, you can find leverage to keep your costs low and reduce the market’s uncertainty. Use other people’s money to expand your portfolio with a mortgage instead of putting all your cash in purchasing the property. With a 20% down payment on a mortgage, you can use the rest of the cash to make repairs and upgrades to the property or make other investments if the property is turnkey for renting.
4. Single-Family Houses Are Easier Rental Property
For a newbie in the real estate investment game, a single-family rental is the easier way to go because you’ll only have one tenant to handle, one property with possible repairs, and it reduces the wear and tears you’ll need to rehab and replace. A single tenant property will give you a faster turnaround in between tenants, keeping your cash flow moving.
People are moving to the Los Angeles area in droves, which means they need a place to live, rent, or buy. Los Angeles property prices are the highest they have been, so the newcomers are looking for single property rentals. Fix and flip property are a television show, but rentals are gaining real-life popularity for the investment dollar.
5. Screen the Tenants
Before the lease agreement is signed, do a background check, credit check, criminal check, and rental history check. When you skip doing any of these, you leave yourself open for many costly problems, not to mention personal stress. A thorough vetting of possible tenants is work but a necessity for your safety. When you skip over any of this, you’re setting yourself up for a loss, especially if this property is your only investment.
6. Restrictions for Short Term Rental
Before you buy a rental property, check the city, count, and develop laws and restrictions for short-term rentals. In certain developments, the HOA prohibits short-term rentals, a way to steer from Airbnb and other rental organizations.
7. Do the Math Then Check the Math
The big question to ask yourself is, “Will the rent cover the monthly mortgage?”, maybe even a few extra hundred dollars. The numbers will speak to you if you do your math and then check that math again. Consider interest rate increases when doing that math too. An excellent monthly rent amount is generally two percent of what you paid for the property. Example: You purchase a property for $100,000, the rent should be no less than $2,000 per month. However, it would be best if you looked at the operation cost of owning a rental too. If the rent you charge is $2,000, fifty percent of that will go toward the cost of maintaining the property.
8. Buy For A Good Rate of Return
Owning a rental property will provide you a steady rental income, and if you sell it for a lump sum profit, the capital gains will be okay. It would be best if you aimed for a cap rate of 7% or more for a good profit. Usually, for an investment, the average rate of return is above 15%. Real estate experts say if you get 10% ROI, you’re on the spot.
9. Refer To Real Estate Finance Professionals for Advice
It is essential to recognize the professionals that can advise you on rental property purchases. The things you need to know like, opportunity cost, and leverage in the financing world. Those experts can help you understand the cost benefits and potential opportunity costs when using all cash. They can explain the financial side with factors like actual revolving cost and true margins.
10. A Written Lease Agreement Is A Must
A legal and proper lease is critical when renting a property and eliminate possible misunderstandings between you and your tenant. This agreement should include the following facts:
- Rental amount
- Due date
- Renters insurance
- Pet policy
- Utilities
- Maintaining property
- Termination fees
With the lease agreement in writing, any dispute later can be clarified by the agreement. As the landlord, you don’t have the authority for deposit deductions for cleaning and repairs upon tenants moving out without a lease.
Closing Words
It isn’t easy or straightforward to make money in rental real estate. Even you hire a property manager, you still need to be involved in several matters. Tread with caution and follow the advice of those who have been there and done that; you’ll be less likely to make costly mistakes.