Buying Rental Property – How to Make Money

If you have decided to venture into the world of rental properties or real estate investing, then you have to make some notes and decide on a few things before you even head out the door.

You need to ask yourself these questions so that you can make an informed decision that best suits your situation and your personality. You don’t want to find out after the fact that you don’t like to interact with tenants, or doing minor repair work, or that you would prefer to rent to a family rather than students, just as an example.

This is a checklist I created when I found my rental property and it helps to decide just how you are going to handle your investment.

What type of tenant would you prefer?

A. Family – meaning long term rental B. Students – constantly changing C. Young Couple no kids – near downtown

I chose Family. By choosing family I was now able to direct my searching to single family homes in a suburb type area of the town we lived in. You are not going to rent to a family in the middle of noisy downtown pubs and nightclubs. So, by figuring out the first question you can then find the right neighbourhood for the right tenant.

If you choose B. Students, you are going to need to find rental property close to buses, schools and malls. So, you need to decide the type of tenant you are looking for.

Price Vs Rent

You need to research the area you are looking at and find out what the going rents are. You need to be competitive so that you can get your property rented quickly. There is nothing wrong with getting a fixer upper (which is what I did) but you have to watch how much you put into the property vs how much rent you will get out.

Most tenants will pay a little extra for a nice home with upgrades, but don’t go overboard. So, you need to look at the price point and then figure out how much renovation money will be needed to bring it up to date. It would be good to bring a contractor or “handy” friend with you to get ideas.

Then you need to work it out. What will your mortgage payment be? What are property taxes? Landord insurance? The tenant usually pays the utilities, but you will have to cover them while you are getting it ready to rent.

Don’t depend on the values going up for your income. You need to have “Positive Cash Flow” for this to work. (Rental income less expenses = positive cash flow)

Self Manage or Property Manager

Will you be willing to self manage? What this means is you will be responsible for finding tenants, and get any phone calls from them when something goes wrong or making sure they pay their rent on time. This means all the rent goes into your pocket (minus running costs of course) but there will be the added headache of being on the front lines if there are any problems with the tenants you chose or work that needs doing.

You should live in the vicinity of the rental property if you choose this option. Tenants are more likely to stay if they know you will keep on top of the place and the maintenance.

Will you use a Property Manager? The plus side to this is if you get a recommended manager, they will find the tenants and be the front line for any issues that may arise. You will be called if it is something major. You give them an amount that they are allowed to make decisions with, such as repair people for appliances, or other minor repairs. The downside to this is that you will have to pay them. It is usually 8-10% of the rent.

They collect the rent and issue you a cheque each month. So, if you prefer to have a property manager for your rental then you need to allow for their expense when trying to find the right property.

Renovation Costs vs Rent

If you find a rental property you feel has good bones but the decor is from another era, then you need to allow money for renovations or at least decorating. If you find a house with good basic bones then you can decorate quite cheaply with stripping wallpaper, paint and spend the balance of the money in the kitchen and bathrooms.

If you can redo the kitchen and the bathrooms, you can ask higher rent. I had a rental property in a residential neighbourhood of houses built in the 70s. I was able to ask 200.00 dollars more for my property simply because the kitchen was modern.

Just don’t go overboard or you will not recoup your costs. Keep in mind the neighbourhood you are in, you don’t want to be the most expensive house on the street. I found a great deal on a kitchen at Home Depot. Stick to a basic plan and you can get good value.

Ask yourself the above questions, make notes, assess yourself and what you think you can handle, and then go for it. I have found owning a rental property rewarding, although there were some days I could have given it away when the 3 year old furnace broke at 11pm on the coldest night of the year! But that is because I “self manage” the rest of the time it is quiet on the rental home front and I take cheques to the bank!

Also see: Best Tenant Screening Tips Renters Insurance Do Your Tenants Have It? to get more tips on investing in rental properties.