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Rental Property Investment Basics

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There are a multitude of reasons investing in rental properties, plexes or apartments in Portland Metro may be a wise business decision for you:  you need more current income, you want to obtain wealth for when you retire, you want to lower your housing costs, and lastly, you want to utilize appreciation to hedge against inflation.

The following is an almost infallible, low-risk way to succeed with your property investment goals.

  1. Look for rental properties that are rented at below market rents.
  2. Make an offer based the the current, actual rents NOT what rents could/should be.
  3. If accepted, have a home inspection.  Many times, these properties have deferred maintenance.  So, be prepared to spend 5 – 15k per apartment to fix the problems.
  4. Start raising the rents; for example, if the rents are $400 below market, raise them $50 every six to nine months, until you reach current market rents.  Communicate to the tenants you will be doing this.  They may not be happy, but they will understand – especially when you start making improvements.
  5. If a tenant moves – repair and remodel as needed.  Then, rent at market rents.  That could mean an immediate rent jump of $400 per month = $4,800 per year.

This method makes you money by providing for more capital to keep improving the rentals.  When it them comes to selling your property –  a quality property will sell for higher Gross Rent Multipliers (GRM) than a run-down property.

What is a GRM you ask?  It is one of the simplest yet effective measurements of a property’s value based on its income. PRICE/RENTS PER YEAR.  This formula does not included operating expenses (property taxes, insurance, utilities), vacancy factor or annual maintenance rates .  It is only a simple quick way to compare properties for sale.

Example:  asking price is $500,000 for two two bedroom apartments renting for $1500 each.  Annual gross rents would be 2 x 1500 x 12 = $36,000.  So, using the GRM formula — $500,000/$28,800 = 12.5.  Therefore, the gross rents would pay for the property in 12.5 years.  Again, because of expenses you won’t return your purchase price in only 12.5 years, but it is a quick way to compare properties.

 

Other things to consider when looking at investment properties:

  • Future appreciation is the best reason to buy investment property.  Your tenants are paying you the costs to own it and you reap the benefits of future appreciation.
  • Plan on holding on to property for at least 10 years.
  • Expect a 5% vacancy factor and 5 – 7% annual maintenance rate.
  • If your mortgage payment is more than 50% of your probable rent, you have too much mortgage debt.  Save for a larger down payment.
  • Different neighborhoods will have different GRM.  For example,  NW Portland, Laurelhurst, Hawthorne Distict and SW Portland have higher GRMS than most other areas of Portland.
  • Look at who pays which utilities.  The less utilities the owner pays, the better.
  • You will have the walkthrough only after your offer has been accepted if the unit is currently rented.

If you are interested in purchasing an investment property or have any questions on the subject, contact me.

 

 

 

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