As we talked about in our business plan, our long-term strategy for creating financial freedom is to purchase a number of cash flow rental properties. We’re not just purchasing any properties though. They have to meet strict criteria that we have developed. These criteria are aimed at maximizing both our cash flow and appreciation potential for the properties that we are investing in.
Criteria # 1 – Location
The first three rules of real estate are LOCATION, LOCATION, LOCATION! Well, it really is true because location is one of the few things you cannot fix on your property. If you purchase in the wrong location, the performance of your property may be doomed from the beginning.
Now, there are specific things we look for with any location we are purchasing property in.
- Good schools - when we say good schools, it’s really a relative thing. You want the school district your property sits in to be better than the school districts in the surrounding areas. This creates a natural demand for people to move into your area which drives home prices in your favor and creates a generous supply of long-term renters.
- Good neighborhoods – This goes without saying. Obviously you want the neighborhood where your property is located to be a place where people want to live. You need to look for things like well-kept lawns, flower gardens, and well maintained homes. You don’t want to see weeds, overgrown grass, and houses that are falling apart.
- Low home prices – At the end of the day, your property will need to cash flow. Finding good neighborhoods is relatively easy, but finding good neighborhoods with low home prices is where things start to become difficult. They do exist though…
Criteria #2 – Property Amenities
Once we find an area, we need to be looking at specific properties in that district. This criteria is really aimed at maximizing your tenant pool by providing your prospective tenants with the amenities they are looking for. So each property should have the following features:
- 3 or more bedrooms – We really don’t like the idea of purchasing 1 or 2 bedroom homes because it simply limits your tenant pool, and your rental rate will be much lower. We’ve found that 3 bedrooms is just about right for rental properties. This size home will allow a family of 2, 3, or 4 to comfortably move into your property.
- Basement – For us basements are a must. They provide your tenants with extra room that they can use for storage or they make an excellent playroom for kids.
- Floor plan – We don’t have specific requirements for a floor plan, rather what we are looking for here is to make sure there aren’t any oddities with the property. For example, you don’t want to open the front door and walk into the kitchen. Your tenants will find this weird too. As a result you will get lower rents, and you may have a tougher time keeping your property rented.
- More bathrooms are better – Obviously your property needs to have at least one bathroom, but having an additional bathroom is always a plus. It is not mandatory, but it will definitely make your property much more rentable, and it will increase your rents.
- Garage – Garages are an excellent feature for a rental property because they provide extra storage space for your tenants. Garages are not mandatory, but they make your property more rentable.
Criteria #3 – Property Condition
We’re not afraid of doing a little rehab on our properties especially if it means we’re getting a great deal. However, there are specific things we’re on the lookout for with our properties. These items can cause big issues and many times we don’t even want to deal with them because there are many properties out there that don’t have these types of problems.
- Water Issues – We don’t like to mess with water because it can be a huge problem with any property. Water can cause damage to your property in many ways, and if you have water issues it can be a real nightmare. Generally if we see evidence of water in the basement or a leaky roof we start asking lots of questions.
- Foundation Issues – Foundation issues can be very expensive to fix. If we see a foundation issue we really don’t like to consider the property.
- Roof – Generally we want to see a new roof on the property. If the property is in need of a roof, we may still purchase the property, but the cost of the roof replacement will be figured into our offer.
- Windows – Windows can be a very expensive item to replace, so you’ll want to make sure they are in great condition. Again, if they’re not, you need to figure in the replacement cost when you’re submitting your offer.
- Mechanicals – We like to lump the plumbing, electrical and HVAC systems into one category called mechanicals. The fact is these systems need to be in tip-top shape and up to code. If they’re not, you need to figure in the cost of repairs in your offer.
Criteria # 4 – Cash Flow
Lastly, we need to make sure our property will cash flow, so you need to look at the rental income you can expect along with the expenses the property will incur. We will talk about this more in our next blog when we discuss how to analyze the numbers on a rental property.
If you can meet all 4 of these criteria in the rental properties you are purchasing, you will be taking the right first step towards making your rental properties a success. Remember, it’s all about planning with rental properties and meeting these criteria will help you maximize both your cash flow and your property’s potential for appreciation – both of which will increase your bottom line.