Investing in rental properties can be a great way of creating income, and there’s more than one approach that investors will take when deciding what to buy and where to buy.
Many real estate investors choose to buy what we call a “turnkey” rental home. This is a property that’s nearly ready to be listed on the rental market right away. There is minimal work or repairs needed to get started placing tenants and generating income.
For most investors, this is the easiest way to buy and rent out homes. There’s not a lot of work required between closing the deal and marketing the home.
However, it’s not the only way. A lot of investors look for distressed properties when investing in real estate. They’d prefer to purchase a non-turnkey home or a property that needs quite a bit of rehabbing and renovation.
The best strategy starts with your investment goals. You have to know what you’re hoping to achieve.
Here are some of the things you can expect when you’re buying a rental property that is NOT turnkey and in fact needs a bit of work before it’s ready for the rental market.
Understand the Value of Dayton Property Management
If you’ve purchased an investment that will need some rehab work, partner with a property manager right away. At ManCo Property Services, we have an entire division of professionals dedicated to helping investors make their properties rent-ready.
With professional help, you can move through the process faster and more affordably. You’ll have immediate access to all the licensed vendors and contractors you need, whether it’s plumbers or painters or landscapers. We can help you navigate the process towards moving from distressed properties to rental homes that are ready for outstanding tenants.
We always like to remind investors that there are many reasons to leverage a property manager’s expertise before you invest. While you likely think of your management partner as someone who will help you lease, manage, and maintain your home after it’s already in your possession, we can also be extremely effective at helping you choose the right investment property and navigate the real estate market with your future tenants in mind. Leverage our understanding of:
- Local rental values
- Competing properties
- Maintenance needs
- Legal and regulatory requirements involving habitability
We can help you make some good decisions and avoid some serious mistakes when you invest in a rental property that is not turnkey.
What to Look for in a Real Estate Investment
If you know you’re not going to buy a property that’s immediately ready for the rental market, what should you be looking for in a high-needs property or one that might be defined as distressed?
First, you should make sure you’re not beyond the point of no return. A reasonable price range for a property that needs rehab work is about 10 or 15 percent below market. A property that’s being offered at a 30 or 35 percent discount should alarm you. That says there is more wrong with this home than what is being shared. Stay away from anything that is priced too good to be true. It’s not the gem you think it is. It’s not a deal, and it’s not a steal.
Have an inspection before you buy so you know exactly what you’re dealing with. There should not be any surprises once you’ve closed and you’re putting together a plan for how to approach the work. You need a detailed inspection report that tells you exactly where the trouble spots are.
Prepare for the Costs of Renovation
If you’re not buying a turnkey property, you’re going to have to invest some time and resources into preparing this property for the rental market. There will be other costs, too.
Budget for how you’ll pay for the rental property while no rent is coming in. If you buy a building that needs three months of work, you will have to cover the costs of those three months without any rent. You’ll need to pay for the labor and materials, the utilities that need to be kept on, and any other bills that pop up during the renovation period.
There’s not going to be an immediate tenant in place. After the work is complete, you still need to take the property to the Dayton rental market, and that could take some extra time. You’ll need to invest in some great marketing photos. You’ll need to have the place professionally cleaned. You’ll need to do some aggressive marketing and advertising.
It’s possible you’ll spend three months or more just preparing the property for the market. Then, you can expect another month of advertising and showings and tenant screenings. By the time you get a paying tenant in place, you will already have spent several thousand dollars on this property that hasn’t earned you any money yet.
This is part of real estate investing, especially when you’re buying a distressed property. It does not need to be a deal breaker when you’re deciding what to buy, but you do need to be prepared.
Invest in High Quality Vendor Relationships
Whether you invest in a turnkey property or a distressed property, make sure you’re working with a great team of vendors and contractors as you’re getting the property ready for the rental market. You don’t want to rush the work, and you don’t want to partner with contractors who are likely to rush the work.
Invest in high quality work and materials. Don’t settle for Band-Aids on problems that require extra effort. That’s only going to lead to more expensive work once you have a tenant in place. It has to be more than just cosmetic. The property has to be in excellent condition, and likely to increase in value immediately.
Look for an Accredited Buyers Representative when you’re investing in distressed properties or buying off market. And always work with a Dayton property manager who has experience in this area.
We have experience in both fields, we can help, and we’d like to. Contact our team at ManCo Property Services.