Finding the right market to buy a rental property in may look difficult at first, but it’s not as complicated as it seems. MoFin Lending put together this guide to give you a good starting point on your search.
Whether you’re investing in a market local to you or out of state, there are multiple strategies to employ that can make your search easier. One thing to ask yourself early on is whether you’d prefer to invest in a market that may not be proven but could offer much higher returns or in an area that, although you’ll be paying a premium to be a landlord in, offers you a lower return but with a lot less risk and headaches.
Established or Up-and-Coming Markets?
The first question to ask is: would you rather choose an established or an up-and-coming market?
A huge advantage of investing in an established market is that the demand for rentals is already present. That makes it easier to find good, qualified tenants. Also, rental rates are higher and late or missed payments are usually much lower in established areas (usually in cities or suburbs outside of major cities) when compared to up-and-coming markets (typically suburbs on the outskirts of cities). There also may be more reliable data available for rental properties in an established market, so knowing what the appropriate rent to ask for is easier to determine on your own. But one downside to purchasing a rental in an established market is that your purchase price, and down payment, is often higher as are your property taxes. This hurts your debt service coverage ratio (DSCR) and, ultimately, your residual income, or net income, from the property.
Investing in an up-and-coming market offers the potential to acquire a positive cash-flowing rental property at a lower purchase price. This lower cost-of-entry has another significant advantage of its own: the ability to buy multiple properties and scale quicker. Also, your return is much higher. There is also the possibility of property values appreciating, which increases your equity, putting you in a great position to cash-out refinance and re-invest down the line.
An expected downside of choosing an up-and-coming market is that they have less demand, both as rental and for a sale, and finding strong tenants may take longer. This can result in needing to hire a property manager or management to find and screen tenants, which only increases your costs to budget around and decreases the residual income from the property.
After deciding on the type of market you want to enter, here is the type of data you need to consider
Using figures from the Census Bureau, you can get a good indication of recent population growth. Finding the fastest and slowest growing cities can be one metric to help you decide on which markets are in demand and which ones to avoid. In addition, purchasing a property in a market with a population count over 40,000 – 50,000 may be easier to finance, as lenders tend to favor metropolitan statistical areas (MSA) or the suburbs that surround them.
Existing Home Sales
Using the National Association of Realtors Existing Home Sales metric is an excellent indicator of how your chosen markets are performing. Increasing home sales help point to areas where demand is emerging or continuing to remain strong; these markets may command higher purchase prices but also offer the opportunity to charge more rent and potentially profit from appreciation. Decreasing home sales may mean choosing a different area completely or getting a property on a discount that can cash-flow way more than you anticipated.
It goes without saying that one of the most important metrics for deciding on the right market is the rental rate that comparable units or properties are going for. Using data from online rental listings is a way to get an idea of whether or not the property you’re looking to buy is in the condition to command a certain monthly rent. If your property is not rent ready or not up to par with similar properties, then you’ll need to come out of pocket to make upgrades. Understanding current and historical rental rates is a good way to gauge how much you should be spending on improving your property and how quickly you’ll be able to get that money back through the rent you’ll charge.
You’ve found the right market and the perfect property. What is the best way to get financing?
After doing your due diligence and finding the right rental property in the right market, all that’s left is deciding how to finance it. Rental property loans are built for this situation, and rental financing through MoFin makes this process straightforward, easy, and quick.
Multiple rental property types covered
With so many options to choose from in terms of rental properties, you need a lender that can cover multiple types. Whether it’s a single family home, two to four family property, a condo, or townhome (and in some instances a 5-12 unit multifamily property), MoFin can provide rental property financing with a 30 year fixed rate to your entity (LLC for example) based on the property’s income and not your personal income.
Close Within 30 days
In the real estate market, a few days can mean the difference between closing on the perfect property or missing out on a deal completely. MoFin Lending can close in as little as 30 days, meaning you’re on the way to generating income from your rental investments sooner but, more importantly, you’re beating out other bidders on the property.
No tax returns or personal income check required
Going with more traditional sources of financing your means jumping through hoops to see if you’re even eligible in the first place. With MoFin, you can get pre-qualified within 5 minutes and you can do this without getting your credit pulled or providing sensitive information. Rates start at 5.00% for a fixed 30-year loan, which again requires no income check or tax returns. It’s bank-like financing terms without the headache or hassle of a bank-like process.
Finding the right rental property comes down to first deciding on what type of market you want to enter. Established and up-and-coming markets both offer advantages and disadvantages, it’s just a matter of finding the right one that fits your outlook and financial situation the best.
Several metrics are useful for determining the right market for your needs, including population data, recent and historic rental rates, as well as existing property sales, crime statistics, and employment figures.
Properties are best financed through rental loans, based on the properties cash-flow to your LLC, which are specifically made for the financing of investment properties. Companies offering this type of rental property financing, like MoFin Lending, provide certainty of a quick closing and offer a no personal income solution, on a 30 year fixed rate loan.
With all this in mind, you are in a good spot to find the right market and the right property. Combine that with a rental loan from MoFin and you’re in the perfect position to sit back and start collecting rental investment income.