There are 5 questions every landlord needs to ask about their rental property.
Asking these five questions can save you thousands of dollars and whole lotta’ heartache!
In this video, Matthew Whitaker walks you step by step through these questions that will help you make better decisions about the rental houses you buy.
A full transcript is below this video.
Hey everybody. I’m Matthew Whitaker with gkhouses and today I’m going to talk about five questions every new landlord needs to ask about their rental home.
I’m going to tell you a quick story about my first rental house and one of the mistakes that I made, and then that’s going to lead into some of the five things.
When I first bought a rental house, it was from one of the guys here in the office. I always blame him for getting me into this rental business. The house was absolutely covered in fleas. The house needed a ton of work and he sold me this house. I was so excited because I beat out some other investors for the house.
One of the things that I forgot to do was to look at how many trees in the yard actually needed to be cut down. It was not something I really thought about because I was so focused on the house that I had forgotten to take a step back and look and see the bigger picture.
So I hope that these five things that we’re going to talk about today helps you take a step back and look at the big picture.
Now, what happened with those trees? Well, basically I had to spend $2,000-2,500, extra dollars that I had not planned on spending, just because I didn’t drive up to a home and look up.
I always tell people, when they ask, “Well, what’s the first thing you look at when you go to look at a potential rental home to buy?”
The first thing I do is drive up and I look up in the air and see how many trees need to be cut down.
So let’s take a look at the five things you need to look at when you’re looking at buying your first rental home or buying a new rental home.
1. The Age of the Home – Now, the age of the home affects so many different things that it’ll really affect your return on your investment. One of the biggest things the age of the home affects is just your monthly repair and maintenance numbers.
You can imagine a house that was built in the 1940s or the 1950s, the systems in it are much older than a house that was built in the 2000s, so they’re going to break down more often. Certain systems, like the heating and air, may not have even been put in the house originally.
So those systems breaking down will actually cause you to have higher repair and maintenance. The walls are 50, 60, 70 years old; obviously, those are going to break down. The electrical, just items break down more often.
Your repair and maintenance numbers are higher when you’re talking about a house that was built earlier rather than a house that is more recent, so age of the home is the first thing I look at.
2. Street Scene of the Home – What do the houses look like around it? Remember, I talked about taking a step back and evaluating the house. This is one of the best ways to take a step back and evaluate that house.
What do the neighbors houses look like? Do the neighbors keep up their home?
We have a lot of rental houses that are absolutely great rental houses that simply don’t rent because the neighbors are trashy. They have cars in the yard, kids toys everywhere, grass grown two feet high.
What do the houses look like everywhere? Are there burnouts on the street? Are there people loitering around? It’s very important that you take a step back and evaluate the street scene. Don’t get so focused on the house that you forget about the bigger picture.
3. Rental Market Rate – One of the things we say, especially when you’re new at this, is to use some sort of objective opinion of market rate. This is a great place that a property manager would actually come in, helping you evaluate what the market rate will be.
Please don’t listen to somebody that’s trying to sell you the house at what the market rate would be. You need some sort of objective, third-party opinion, especially if you’re new.
Now, some of you more savvy, older investors that have been in this business a while, you can usually drive up to a house and know exactly what the market rate’s going to be. But if you’re just getting into the housing business, into the rental business, you want to be very focused on getting an objective opinion of market rate.
4. White Elephant Issues – Now, what is a white elephant? A white elephant is an issue that you can’t change that has an effect on the market rate or has an effect on the rentability of the home.
So white elephants can be living on a busy street, living near industrial park. We frequently see bedrooms where you have to walk through a bedroom to get to another bedroom. We see houses where the second bathroom is actually in the basement. So there’s only three bedrooms, one bathroom on the main level and a second bathroom in the basement level.
There’s so many different white elephant issues and a white elephant is not something you can necessarily change. You may be able to put a privacy fence up to avoid seeing all the industrial, but the house may be just next to the industrial and that’s not something you can change.
You need to be very – again, there’s the word – “objective” about identifying white elephant issues. Take a step back, evaluate the house as if you were a renter.
Would you want to walk through another bedroom to get to a bedroom? Would you want to go into the basement to take a shower?
Certainly people are willing to put up with these types of things, but it’s definitely going to affect the market rate of the home. So you need to be very mindful of how that’s going to affect the market rate of the home.
5. The Retail Market of the Home – Don’t just think that every home has a retail market. There are certain investor class neighborhoods where they’re always going to be bought by investors.
They’re investor homes that will never be owned by anything else other than an investor. So they’re going to trade on things like rent rates, and trade on things like cap rates.
There’s more B and A class neighborhoods that do have a retail value. So it’s very, very important that you’re mindful of, what is the retail value, or what is the real return value of that house.
What can I sell that house for? Again, this may be a place where you’d want to get an objective opinion if you’re just getting started.
So those are the five things, if I was a new investor, that I would look at when I’m buying my first, or some of my first, rental homes. I hope this has been helpful.
With any of these five, if you run into this situation or you’re evaluating a rental home and you’d like an objective, third-party opinion, that’s something we’ll do for free. So I hope you’ll reach out to us.