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If you wouldn’t walk down the street alone then quality tenants won’t want to either. Try to see if there are kids playing and people walking dogs. This will give you a good idea of how comfortable the residents are.

Look for locations close to popular stores, restaurants, and coffee shops. Also if you can get the inside track on areas where trendy businesses will be built try to get in and buy before property values go up!

If you’re buying a single family home or townhouse look for neighborhood upkeep. If people are making improvements to homes and land then there is a vested interest by the locals to keep the area visually appealing.

Proximity to transportation is important. Is the area 100% car dependant or can your potential tenants get around without a vehicle if they needed to?

Finally, how long homes in the area stay on the market is a good metric to look at. If owners have a hard time selling properties in the area chances are you will too when the time comes. Exit strategies must be taken into account. But maybe more important then that is; if homes aren’t selling, then why not?

If you followed step one and found a good location, you don’t want to buy the house that has been recently renovated. You won’t be able to add any value. Adding value is where you make your money.

Buying a house in a great neighborhood that needs some work will give you opportunity. Opportunity to ensure that you cash flow on the property by getting in at a lower price and then putting in some rehab money to make the place attractive to your potential residents.

This can be done through direct marketing campaigns or simply networking with people in real estate.

Cash flow is king. As we talked about in Why Real Estate Can Beat Bitcoin and the Stockmarket in a Fist Fight you want to use the 2% rule (rent should be 2% of your purchase price) as a guide. Knowing how much rents are in the area will help you calculate what your purchase price should be.

Purchasing at a great price means less if you have a high interest rate. Interest rates can cost you thousands.

When starting out make sure you go with fixed interest rates. These rates stay the same for the life of your loan.

Say you buy a property for $150k and you put 25% down (standard for investment properties).

If you have a 3.5% interest rate your mortgage payments should be about $815 per month. If you boost that interest rate to just 5% you’ll be paying more like $930 per month. That’s an extra hundred per month in cash flow down the drain!

Property taxes vary depending on your specific county or city but below you’ll find the states with the lowest and highest effective tax rates.

These states have the lowest effective tax rates:

1. Hawaii (.32%)
2. Alabama (.48%)
3. Colorado (.52%)
4. Tennessee (.54%)
5. Delaware (.56%)

These states have the highest effective tax rates:

1. New Jersey (2.31%)
2. Illinois (2.13%)
3. Texas (2.06%)
4. New Hampshire (2.03%)
5. Vermont (2.02%)

Operating expenses are what it costs you to run your property.

Along with property tax which we covered in number 5, this also includes insurance, property management , maintenance, capital expenditures, and hoa/condo fees.

Insurance

Insurance is a must have for any investment property. If anything happens to that property or anyone in it you can be held liable as the owner.

Lots of things can impact insurance rates. Shop around before you buy and make sure if covers everything you need protected.

Property Management

I know, you’re gonna manage the property yourself. Why would you need to account for property management?

There may come a day where you don’t want to, or can’t manage the property. If that day comes you’ll have already accounted for the drop in cash flow.

If you manage your own property make sure it will still cash flow positive if you have to pay a property management company one day.

A good rule for this is to allot 10% of the projected rent to property management.

Maintenance

Maintenance can be anything that routinely needs servicing. For example, you need to get a homes

HVAC serviced periodically. You may also need the chimney looked at, landscaping, powerwashing, gutter cleaning…you get the point.

You should allot 10% of the rent for maintenance as well when analyzing whether or not a property will cash flow.

Capital Expenditures

This operating expense deals with big ticket items. These will be things like getting a new roof or a new HVAC system. These items can put a serious dent in your profits if you don’t plan for them. A good conservative estimate is 10% of the rent once again.

Vacancy

While it’s not really an operating expense you should also account for how often your property will be vacant. This is arguably the most important thing you should factor in to your costs.

When the property is vacant you’re still responsible for the mortgage, taxes, insurance, and yes…even the utilities!

You’ll want to add another 10% of the rent to account for vacancy.

All together that’s 40% of your rental income just for operating expenses. Of course you don’t have to use 10% for each of these categories. This is just a conservative starting point.

Each deal and market is different. Know your market and your consumers and adjust accordingly if you need to.

Finale

Granted, it sounds like there are a lot of things that will just kill your cash flow. This is why really good deals can be really hard to find! You almost certainly won’t find them using regular real estate finding websites unless you can negotiate the price down.

Trust me. If you take these factors into account when buying your investment property or even a property you’ll be living in (which is an investment) you’re likely to come out a lot better than if you didn’t.

I’d love to hear your success stories or help you analyze a deal.

All you have to do is HMU, I’ll be around!