How to Create Awesome Criteria for Buying a Rental Properties
Guest Post by Maria, from Handful of Thoughts
One of the first things I did before investing in rental property was to get educated. There is a lot of information out there and everyone seems to be selling one program or another. It is easy to get overwhelmed.
While I think that education is crucial, it is also important to not fall victim to paralysis by analysis. One way to counteract this is to create a system.
Related: 5 Real Estate Mistakes I Made as a New Investor
I am a huge fan of systems and create them for any task that I have to do related to real estate investing. My system for purchasing a rental property has to do with my criteria for purchase. We have our criteria nailed down to the point where when we bought our last rental property we put an offer on it without my husband even seeing the property.
Whenever we are looking to purchase a rental property we will know within 10 minutes of viewing it if it fits into our criteria. This is the opposite of paralysis by analysis. Our criteria have been refined over the years and have resulted in a near-zero percent vacancy rate on our 9 rental properties throughout the time we have owned them.
Creating a Tenant Profile
Before getting to my specific rental property criteria it is important to start with a tenant profile. The tenant profile is the description of what your ideal tenant is like.
Do they own a car?
What is their employment status?
Do they have pets?
What is their credit score?
Are they a family or a single person?
Are they a university student?
The answers to all of these questions make up your ideal tenant. Once you know who your ideal tenant is, then you will want to purchase the ideal property for them. When the tenant profile matches the property type, your relationship with the tenants becomes easy. When the tenant profile and property type do not match, issues often arise.
Related: Practical Ways to Love Thy Tenant
Those issues may be a vacancy, difficulty renting, or even vandalism or damage to the property. An example of a mismatch would be if you identify your ideal tenant as a young family but yet you only purchase or own one-bedroom condos. I don’t know too many families that would choose to live in a one-bedroom condo when there would be other choices on the market.
When the market is booming you can get away with having a mismatch between the tenant profile and property. But when vacancy rates go up, you don’t want to have your properties vacant. Every month of vacancy affects your bottom line.
Buying the right property for your ideal tenant will help to decrease your vacancy rate and increase your profits.
My Ideal Tenant
When I first started investing, I was overwhelmed with trying to determine my ideal tenant profile. Now after years of investing in multiple properties, I have honed in my tenant profile.
My ideal tenant is a young family with both parents working full time. The kids are usually younger or school-aged. The family owns 2 cars and a pet of some kind. They have a solid credit score but not usually an A+ rating. If they have had credit issues in the past they are open and honest about this upfront. The family has ambitions of one day owning their own home but are not currently in the financial position to do so.
Remember – your tenants do not need to fit this description exactly. In fact, if you try to fit this description to the tee, you could run into fair housing issues!
You use the tenant profile when buying a rental property. Pick out a rental property with your tenant profile in mind.
Criteria for Buying Rental Properties
Okay, now I will go over the criteria I use for buying rental properties.
It comes down to three main criteria points: Location, Property, and Price.
Criteria #1 – Location
Because my ideal tenant has kids, one of the first things I look for is proximity to a school. If a tenant has kids that attend a nearby school, they are more likely to stay in the property and not move as frequently. That being said you will also want to make sure that it is a school that your tenant will want to send their kids to.
Even though having two vehicles in the household is one of the things my ideal tenant has, I also look for properties close to amenities. Nobody likes to drive for 30 minutes just to get groceries or fill up their car with gas. Having shops and gas stations nearby a property I’m looking at is an absolute plus.
Related: 5 Ways You Can Start Learning Your Market
That being said, there is a good chance that the tenant will have to commute to work. For this reason, I look for properties that are close to major transitways. I don’t want the property to be directly on the transitway (or even backing on to it). But I like if it is within a 5-minute drive.
Sometimes the properties we look at are in newer communities where everything is not developed yet. That’s okay as long as we can see the plans for what will be developed in the near future.
Although I like newer neighborhoods I do not want to be the first person to buy in that area. I like a newer neighborhood with some development and lots of potentials.
Criteria #2 – The Property
Now that I have focused on my desired neighborhoods, it’s time to think about the property. Remember that tenant profile you came up with earlier? It’s time to bring it back to the front and center. What type of property would be perfect for your ideal tenant?
The perfect property for my ideal tenant has 3 bedrooms and 2.5 bathrooms (although I will settle for 1.5 bathrooms for the right property).
There is a double garage, ideally detached. The benefit of a detached double garage is that you have the potential to rent it out for extra income. This is much more difficult to do if the garage is attached.
I prefer to purchase newer (if not brand new) properties. There is less maintenance with a newer property and new is always more attractive to tenants. With a new property, chances are it doesn’t look or feel “like a rental.”
Because I prefer newer properties often the basem*nt is undeveloped. At first, I was concerned with this and had made mental plans for finishing the basem*nt as soon as possible. But to be honest we have never finished a basem*nt.
When we crunched the numbers, a finished basem*nt in our area doesn’t get that much more rent than an unfinished basem*nt. The benefit of an unfinished basem*nt is in its potential. It has the potential to be a fitness area, kids play area, area for the pets, or any other space your tenant may want.
Once the basem*nt is finished its purpose is less flexible. And an unfinished basem*nt appears more spacious.
Criteria #3 – Price Point
If you have been following along, you have outlined who your ideal tenant is, what neighborhood they want to live in, and the perfect property for them. Now it’s time to crunch the numbers.
Rental Price
Before going to look at properties it is important to know what the market rents are for your area. A quick online search can tell you what your perfect property rents for in your ideal neighborhood.
When doing an online search make sure to also look at what’s included in the rent. Does the rent include utilities? Outdoor maintenance (like cutting the grass or shoveling the walks)? Use of the garage? Is there a pet fee or non-refundable pet deposit for pets?
If the rental ads you are looking at don’t provide the information you are looking for, don’t be afraid to call the landlord and ask. Pose as a prospective tenant and gather the information you are looking for.
Related: 3 Reasons Your Property Isn’t Renting
Property Price
Once you know what the going rents are, you can calculate your ideal purchase price. You want to be sure the purchase price (and mortgage) is not too high because you want all your rental properties to be able to cash flow.
One rule of thumb to calculate the rental price to purchase price ratio is the 1% rule. Your rent should be at least 1% of the purchase price. For example, if the market rents are $900 per month then the ideal purchase price is $90,000 (or less).
The 1% rule for new investors. If you cannot find a property in your area that meets the 1% rule, don’t be afraid to look in another area, maybe another city. Or look at ways to increase the rent on the property. If you were including the garage in the monthly rent, maybe you could rent it out separately for more monthly income.
Personally, my investment properties do not meet the 1% rule but there are other factors in play and we are still able to have all of our properties cash flow.
Final Thoughts
There are many factors that go into buying a rental property. The main one to always consider and keep in the back of your mind is the tenant profile. In order to decrease your headaches in the future, you want to buy the right property for your tenant profile.
Once you have described your ideal tenant, start looking for favorable neighborhoods and properties that fit the profile. With a system in place, you will decrease your paralysis by analysis and increase the likelihood that you will pull the trigger and add a property to your portfolio.
Related: How We Found Our First Rental Property
Lastly, do not be afraid to seek out a mentor in your area. Find someone who is investing in your area in the type of property you are looking for. Offer to take them out for lunch and pick their brain. They may have some insider information on your area, type of property and tenant profile that you can’t find online.
I hope you found this helpful, feel free to ask any questions you may still have in the comments below.
What criteria do you use for buying rental properties?
Written By Maria from Handful of Thoughts
Maria is a Canadian money & momma blogger. She paid off a $342k mortgage in under 5 years. Maria is currently applying a Financial Freedom Mindset in her pursuit of time freedom.
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