So, You Want to Buy a Rental Home?

First of all, if you are reading this AND you still want to be a landlord, I am certainly impressed. It really isn't that bad. Normally.

And, it is a a walk in the park if your tenants aren't doing anything illegal and they are paying on time.

Recently, My husband asked me which houses I would want to keep and which ones I would dump if the market were better. After some deliberation, I came up with my list. My answer surprised me, as one of the homes on my "keep" list was the house in Leeds--with a few caveats.

So, today's primer is how to pick the right rental home. I should put a disclaimer in here. Early on, I didn't follow these rules, so some of my properties aren't ideal. Now I know. And, now I have something to blog about.

Before you buy a rental property, pick a real estate agent who understands your vision. In the event you don't think you need a real estate agent, let me assure you: YOU DO. If you want a list of reasons why, I will be happy to provide them, but for the rest of you out there who are clear on this point, let me cut to the chase: GET AN AGENT.

Most agents are certainly qualified to help you buy your dream home. However, there is a different between using an agent to buy the home you will live in and an income property. The first agent I had in Alabama didn't know a thing about investments. At the time I overlooked this--which is saying something because in my real estate business I specialize in investment properties. I thought I could compensate for her lack of knowledge.

My former agent is good at what she does, but didn't see the big picture. If I ever want someone to sell my personal residence, she would be the aggressive pit bull I need on my side to negotiate my price. However, if I want someone to help me select the right rental home and grow my company, I need an agent who understands the big picture and can crunch numbers. That would be my current agent Jack.

Once you have the right agent, here's a few tips for selecting the right house.

1. The house isn't a home. It's a piece of meat. That is, if the wall paper is all wrong, if the carpet is ugly, use this to your advantage. Cosmetic items a seller won't fix turn off buyers. Just look through it to the bones. Cosmetics are easy to fix. Don't get attached to what is pretty. Become attached to what is functional.

2. Location, location, location. Rental homes are necessary for all walks of life. Most likely, the return on investment for a high-end rental home isn't going to be that great. You might get a great return on a rental in a low-end neighborhood, but you are going to find people who want to live in low-end neighborhoods. As a tangent to this, don't buy in the outskirts. Stay close to major shopping centers and traffic arteries. Outskirt homes might cost less, but that is because the demand is lower.

3. Buy into the school system. More than anything, my tenants care about the school system. I have three homes located in the worst school system in Birmingham. I can rent them. But, of those three, none of those tenants do not have school aged children. And, I am taking a hit on the rent for these homes. I have some homes in much better school systems and my rents reflect it--even if the home is smaller.

4. When you buy a home, you are buying into the neighborhood. Quality tenants want quality neighbors. Though my home in Leeds may not have neibhors who appreciate my value system, the street my home is on is a quiet street where the neighbors take care of their properties. Neighborhood pride is intrinsic.

5. Buy the right kind of home for the culture--at least three bedrooms and two bathrooms. In Birmingham, a second bathroom for a home built in the 1960s, is not as common as it is in Phoenix. For reasons too long for this post, I have two homes with one bathroom. I can rent one bathroom homes, but I am competing against two bathroom homes. Therefore, the tenants I get who might be interested in these homes probably were already rejected by landlords who own two bathroom homes. In Phoenix, I would not own a home with less than four bedrooms. In Birmingham, three bedrooms are acceptable. And, please! No weird floor plans! Recently, Jack and I went into a four bedroom, two bath home. One bedroom was by itself, down the hall. Another bedroom had a door leading to the master bedroom--the only egress to that particular room. And, off the master, was another full bedroom!

6. Make sure the home has the right amenities. A garbage disposal and dishwasher are essential. If you have the only home with a carport on the street with two car garages, your ability to attract quality renters will be more difficult.

7. Location, yada, yada, part 2. Anything that is on a major road, backs a major road, faces a major road or is anywhere near something commercial or multi-family is out of the question. Keep looking. Even if you find your tenant, someday you may want to dump the place and it will be harder to sell at a price you want to sell it at.

8. Cash flow is essential. This is why the house in Leeds is still on my list. My mortgage is low enough and the demand for this area was strong enough to justify my rent. Why own a home where you are taking a loss? It defies the concept of "income property."

9. Expect to be in it for the long haul. Once upon a time, property values in Phoenix shot up exponentially. This was an anomaly. So, any investor who bought before this big spike and then sold during the spike was considered a genius. Myself included. At the time I had an investment partner (who has since bailed) who somehow thought I hung the moon because of this one Phoenix investment. As much as I assured him it was dumb luck, he was way too pleased with the outcome to consider the fact I had nothing to do with this (and from that purchase, we were able to buy several other homes in Birmingham). When the second home we bought and sold didn't pan out as well as expected, I was no longer a genius, but something akin to a festering boil (though I am sure he meant that in the nicest way). So, if you buy a home today--even if you get the most awesome deal alive--think long term. If you can get your cash out of it sooner, all the better. But, don't plan on it.

10. Think like the kind of tenant you wish to attract. There is nothing wrong with modest homes in blue collar neighborhoods. I have a few. I also have some higher-end homes as well. Interestingly enough, my higher end homes generally don't bring in a significantly better caliber of people. Higher end homes require higher rent, higher maintenance, higher property taxes. Lower end homes have less expensive rent, less expensive property taxes and neighbors who aren't as concerned about the neighbor's rusting scrap metal proudly displayed in the front yard. Somewhere in there, I have found a balance. It really seems to boil down to good sized homes, on quiet streets, in quality school districts.

Real estate is a good investment tool if it is done right. I didn't do everything right and am now fixing what I can. I foresee good things in my future, but for now feel free to learn from my mistakes.