Big Wall Street-backed firms that own thousands of rental properties aim for a 5%-7% return on their homes. Individual investors, who don’t have to pay support staff, should shoot for at least 10%, says Brandon Turner of investing website Bigger Pockets.
To ensure you meet that goal, target properties in a nearby neighborhood you’re familiar with, preferably one near an employment center like a university with a healthy demand for rentals. Take a cue from the big firms, which tend to buy homes selling for less than $150,000 that are newer than 20 years old. Take a contractor with you to get a firm estimate of renovation costs. Add renovation and closing costs to your purchase price to calculate your upfront investment.
Check market rents at a website like Rentometer and Hotpads. Rent needs to cover not just loan payments, taxes, insurance, and fees, but also a 20% cushion for repair and vacancies. Your operating income—that’s rents minus expenses, not including debt service—should be at least 1.25 times your principal and interest, says California mortgage broker and investor Kathleen Kramer.
One sure way to tank returns: A bad tenant. For around $25, services such as MySmartMove or LeaseRunner will run credit and criminal background checks.