The single family rental market has been strong in recent years, and many real estate investors are getting on board. This property type needs very little intervention once tenants are found, and can often provide investors with a source of passive income. Use these steps to buy your first single family rental property that is cash flow positive.
Step #1: Get Pre-Approved for a Mortgage
Before starting your quest for a single family rental, getting pre-approved for a mortgage can be a game-changer. This would bring about many advantages. Foremost, it gives you a very clear idea of how much you’ll be able to spend on your single family rental investment property. Thus you’ll know exactly what your budget is going to be moving forward. Furthermore, it can give you a major boost when closing your deal. If there’s competition on a single family rental property, the savvy pre-approved real estate investor will stand a far better chance of closing that deal.
There’s a number of different avenues that investors can utilize when financing a single family rental property. Acquiring a loan through a major bank can be a great, simple way to go. Otherwise, you can look into the local banks in your area for some more flexibility. Smaller banks will often provide real estate investors with more leeway for negotiation.
Step #2: Find the Right Location
The next step to buying a single family rental is to run a single family rental market analysis. Location is everything with real estate, and it can have huge impacts on your eventual success — both positively or negatively. Good locations will offer great returns on investment, while subpar locations can leave your single family rental vacant or unprofitable.
Using the right tools for analysis is therefore very important during this phase. An advanced real estate investment tool, like the heatmap analysis tool offered by Mashvisor, can come to the rescue here. This tool provides a visual representation of any city, and color-codes its different neighborhoods based on investment metrics. You foremost set your criteria, such as listing price, occupancy rate or cash on cash return. Hit the single family property search filter, and the map will immediately show you which neighborhoods have single family homes for sale and will be most fruitful for your next investment.
Step #3: Find the Right Investment Property and Run the Right Numbers
Once you’ve found the best neighborhoods for single family rentals, its time to choose the best investment property. There’s a number of great ways you can go about this. Hiring a real estate agent can be a great choice since their input can go a long way towards a successful investment. Otherwise, you can take on the search yourself with some online tools to find single family homes for sale.
Mashvisor offers a host of powerful tools that can find some of the best investment properties on the market. Our toolbox is especially powerful since it is designed with investors in mind. Unlike most listing services, you won’t be given a dull list of options. All single family homes will be analyzed for their investment potential. You’ll get crucial figures like cap rate and cash on cash return. Knowing these numbers is hugely important when buying a single family rental since they’ll allow you to predict the success of your real estate investment.
Cap rates for single family homes can range along a wide spectrum. If the real estate market is especially strong, you might be able to find properties in the 15% to 20% range. However, a figure around 8% to 10% is considered a good cap rate for single family homes. Therefore if the analysis is far off from that figure, you’ll know to move on to the next one.
Step #4: Figure Out Your Cash Flow
The most crucial consideration when buying a single family rental property is whether it will be profitable. Positive cash flow properties aren’t too hard to identify, you just need to compile the right data.
To figure out whether you’re on to a positive cash flow rental property, you need to take a holistic look at your sources of income and your expenditures. For income, single family rental homes usually won’t have many avenues, aside from monthly rent payments.
The flip side of this is that single family rental properties also don’t involve many costs — at least for the real estate investor. Since there is a single occupant, there aren’t any shared or public spaces that require maintenance. Nor will you be tasked with frequent upgrades, or burdened with any property management costs.
Expenses will, therefore, come in the form of upgrades to be made prior to your first tenant and upgrades between tenants. It’s usually a good rule of thumb to set aside 3% of revenue for annual upgrades.
Once you have an estimate of your upgrade costs, it’s time to calculate cash flow. Using a cash flow calculator can help you keep track of all the moving parts and ensure you’ve made the right calculations. By inputting a handful of details — such as the terms of your loan, down payment, and initial upgrade costs — you’ll get a clear-cut figure that shows you the cash flow generated by your single family rental. If this figure is negative or generally low, then you’re on to a bad real estate investment. This cash flow analysis is hugely important before any investment, to ensure you’ll actually be making a proper income from your rental property.
Step #5: Inspect the Investment Property
A home inspection is crucial before closing any real estate deal. What may seem great at first glance may end up creating major headaches later on. A home inspection from a licensed professional is therefore always a great idea.
The benefits are twofold. Foremost, by identifying the problem areas in the rental property, you’ll know exactly how much needs to be spent in order to bring it to top condition. If the costs are reasonable, then you’re likely still on track for a good real estate investment.
Otherwise, a subpar home inspection will most often allow investors to back out of a deal. Most contracts will include a contingency with regards to home inspection, allowing you to break off the deal if the property doesn’t meet its advertised condition.
If it does, then make an offer with the help of your agent and close the deal.
In the match-up of single family vs multi family rentals, a huge number of investors lean towards the former — and for good reason. They can be a fantastic way to grow your portfolio, no matter if you’re a seasoned investor or a beginner. Cash flowing single family rentals are a great choice for 2020.