≡ Menu

Criteria for Purchasing Rental Property

Any real estate investors out there? I started in the whole real estate game when I graduated from University in 2003. My wife and I bought our current primary residence in the summer of 2003, and our first rental property not long after.

Let me just tell you that being a landlord is like having a second job, and not always fun at that! I’ve had to deal with all kinds of tenants – from very good to insanely bad. The type of tenant that you pick to live in your investment will make a world of a difference. Point being – be picky over your tenants.

Anyways, back to the point of the post, my criteria for purchasing rental property. I have some set rules that have to met before I purchase an investment property.

These rules include:

1. The property must be cash flow positive.

  • Find out what the market rent is for the area, you can typically find this through real estate agents, other real estate investors, or simply by viewing the rental listings in your newspaper.
  • Subtract this by the expected expenses with the rental property. Some expenses include: Mortgage, property/water tax, insurance, maintenance, vacancy, and property management costs.
  • Your CASH FLOW must be positive from day one.
  • If you live in a very expensive housing market and rents don’t cover the mortgage, then I would suggest not becoming a landlord. It simply doesn’t make sense to purchase a property in the “hope” of appreciation. It will only be a matter of time before the property will suck the life out of your own cash flow.

2. Nice neighborhood with low vacancy rates relative to the rest of the city.

  • From my experience, it is ideal if you own a house in a nicer neighborhood because you can charge higher rents with lower vacancy rates. I have also found that nice houses attract nice tenants.

3. I prefer houses that are in good shape and move in condition.

  • I’m personally not the handiest of people (getting better), so I would prefer houses that don’t need a lot of work. I don’t mind buying home that need minor cosmetic changes (paint, cleaning etc), but no major work.

4. I prefer to buy houses that are under market value.

  • You all know that I’m frugal, so I always look for a deal whenever I buy ANYTHING. Housing is no exception.
  • Ways to find houses under market value – landlords who are sick of being a landlord, houses that need cosmetic work, pre-foreclosures, foreclosures, and listed houses that have been on the market for a while. I could go on and on about this topic, but that is beyond the scope of this article.

For you real estate investors out there, what is your criteria for purchasing investment property?

If you would like to read more articles like this, you can sign up for my free newsletter service below (we will not spam you).

Share and Enjoy

  • Facebook
  • Twitter
  • Delicious
  • LinkedIn
  • StumbleUpon
  • Add to favorites
  • Email
  • RSS

FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 16 comments… add one }

  • Ntex May 2, 2012, 3:58 am

    I’m 19 looking to buy a rental property i’m approved for about a 100k property based on my income cant be to high i goto schoold fulltime

    Any suggestions on cities i can find a good property i was leaning towards hamilton i live in toronto

  • Joel June 15, 2012, 12:44 am

    I’m curious if any readers out there have any comments/suggestions from Calgary? The market seems to be somewhat flat (for now) and I noticed most comments on here are from 2007 – a completely different picture in terms of housing market here in Calgary. Any thoughts/advice from a current landlord appreciated

  • Neil Uttamsingh June 27, 2012, 11:35 am

    @Joel

    If you are in Calgary, you might want to considering checking out The Real Estate Investment Network (REIN). There are a lot of investors in Calgary and Edmonton that are part of REIN. That would be the best source of information for you in my opinion. If you can, try to attend one of their upcoming events. It is a great place to network and meet experienced real estate investors who are actively purchasing rental properties. Best Regards, -Neil.

  • Tom November 3, 2012, 12:10 am

    When determining positive cash flow, does one generally consider income tax on the rental income as an expense?

    I have a two bedroom townhouse that I’m considering renting out. If I consider the income tax on the rental income as an expense, I need to rent it out for $2400 a month to get positive cash flow. If I don’t consider it, $1780 will do it.

  • FrugalTrader FrugalTrader November 3, 2012, 12:12 pm

    @Tom, I do not consider income tax, but not including it should not make you cash flow negative. Income tax is on the “net” rental income, which means after all your expenses (mortgage interest, property tax, utilities, insurance etc).

    For example, if you rent it out for $2k per month, with $1500k/month in expenses, then only $500/month is taxable. No matter how high your tax bracket, cash flow will never be negative because of income tax.

  • Jas November 12, 2012, 12:54 am

    Just an FYI for those who are thinking of investing in rental real estate at this point in the RE cycle.
    worth reading posts at Garth Turner’s blog at
    http://www.greaterfool.ca/

  • Landlord by mistake November 17, 2012, 1:51 pm

    My husband and I recently found ourselves as landlords by mistake. That is, a condo that we purchased with the intention to move into was delayed by at least two years. By the time it was ready, we had two children and the small layout was not conducive to our growing family. Hence we rented it. It has been extremely profitable for us thus far, but I am wondering how we might best shelter the capital gains when we sell? Both of our incomes are quite low right now because we are working pt to raise the kids. Does the capital gains change based on our annual incomes? If so, by how much? I was also wondering if we pay capital gains on the difference between what we purchased it for (3 years before it was finished) and what we sell it for or the difference between what it was worth when it was finished and when we sell it? The difference might be quite significant, I think….Also, how does the tax on the rental income change as our incomes increase?

    • FrugalTrader FrugalTrader November 17, 2012, 2:00 pm

      Basically subtract your purchase price from your selling price, and you have your profit. 50% of your profit is taxable as your marginal tax rates. If both you and your husband own the property, then you can split the profit (depending on your circumstances). So say that you profit $100k from the sale, $50k is taxable. If you are 50% owner, then $25k will get added to your income, and $25k to your husband. Depending on your income for that year, the tax you pay on the $25k will vary. As for the purchase price to use, you’ll need to consult a tax pro for further information.

  • Snazzy Checks March 20, 2013, 5:18 pm

    I’ve always wanted to be a landlord. Mainly for the income. I’ve known so many people who started young with rental property and became “property moguls” at an early age.

    I think the key is to realize that it’s not until the property is paid down that the true “wealth accumulation” really begins.

    So, I’m the hunt for my first property. I appreciated you thoughts about watching monthly value and vacancy rates for an area. Our market is still a little depressed from the recession, so I’m hoping to land something for under $30k and get one of my handy friends to help me with the fix-up.

    Hopefully by this time next year I will be a successful landlord!

  • jqueen March 21, 2013, 9:06 pm

    My husband and I have always wanted to venture into the real estate market but waited until the mortgage on our primary residence was paid off. We then bought a condo but unfortunately didnt have enough downpayment and ended up borrowing from our line of credit to put down 5%, The rent we receive barely covers the outgoings and we end up in the negative every month. If we had to wait until we had a decent downpayment we probably would never be able to buy the property. In your opinion, do you think we made a mistake? All the while I hear that a rental property should be cash flow positive from day one.

  • Danielle March 21, 2013, 9:51 pm

    @snazzy: where can you find a property for $30k and what would it rent for? Here in Calgary I’ve seen titled parking spots for $30k !

  • Ottawaguy March 22, 2013, 2:42 pm

    @JQueen: The question you always have to ask yourself is how many of those cash flow negative properties can you afford to keep? Sometimes people say that they are investing for capital appreciation which in itself is speculation, we simply don’t do that, but that is our choice.The reality is that if you are inexperienced you really need that cushion of monthly cash flow in case the price points on properties in your region start to go sideways or even down. When you buy a property and rent it out you are taking a risk and when you take a risk you should be getting paid. Not helping to pay someones rent. We started off buying condo as they have a lower barrier to entry than other RE investments. I would say you should look at other investments in the area and start doing analysis, there are always good deals to be had you just need to keep looking. There are may resources out there to help you find a good solid cashflowing deal. I would be happy to push you in the right direction.

  • Don Neill April 24, 2013, 12:05 pm

    I agree with the author’s advice, and would like to add my tips based on my experience with my 15 unit apartment building.
    1. ensure that you live within a reasonable distance from your rental property as you will be travelling back and forth a great deal. (15 minutes is ideal)
    2. Screen your applicants with a screening service which does background checks of previous tenancy (evictions), employment history, and credit checks.
    3. Remember; good tenants do not force out bad tenants, but bad tenants will certainly result in good tenants leaving.
    4. Know your rights and those of your tenants.
    5. Act immediately when there is a problem or a non-payment situation.

  • Kirk June 23, 2013, 11:59 pm

    Where’s a good place to look for commercial real estate investment properties? I feel that most properties that would pass investment filters are not on icx/mls and in fact are “gone” before they hit the general market. Any recommendations on where/with whom one would start their search? Do the good deals depend on who you know?

  • InvestAsian May 21, 2014, 8:03 am

    To be honest, I don’t see a reason to purchase rental property instead of REITs. REITs are diversified into types of property such as commercial and industrial that in general, have higher returns that residential property in most cities. Not to mention that the minimal fee is more than worth the hassle of dealing with tenants and gives me more time to research and pursue other types of investment.

  • Jerry Wyshnowsky November 22, 2015, 2:17 am

    Don’t make the same mistake that we did! We borrowed against our fully paid for house to buy a condo which we moved into. We then successfully rented the house to good tenants and everything seemed just fine until we found out that we could not write off the mortgage payment. This was because the intent of the loan was to buy a new primary residence for ourselves. We found ourselves subsidizing the rental property for 5 years in the hopes that it would appreciate which it never did. In fact it became such a money pit and time-sucker that we finally dumped it with great relief.
    Yes, we spoke to 3 different accountants over the years looking for a way around this CRA rule including deemed dispositions and the Smith Maneuver but found that there really wasn’t a practical (and legal) way out of this situation short of moving back into the old house and renting out the condo.
    This was some time ago and I may be forgetting some of the details but regardless my message is to do your homework before jumping into the landlord game.
    Good luck!

Leave a Comment

Pinterest
Email
Print