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Owners Knowledgebase

Investing 101

We receive calls almost every day from people wanting to invest in rental properties. Their questions are almost always the same. What type of property is best for a rental, and what area of the city should they be looking in? The best advice we can offer is... Invest in a property where the numbers are right and you're going to meet your objective(s).

You Make Your Money When You Buy!:
Ok, so what does that really mean? Well there are two well known axioms in real estate. They are ... Location, Location, Location and You Make Your Money When You Buy! Lets take the second one first, "you make your money when you buy." You see, as long as the property can be used for its intended purpose, and isn't worthless, then as long as you buy it for a low enough price to where you will be able to make money off it, you've probably got a good deal. What type of property might be worthless or almost worthless. How about a condemned property that was used as a toxic dump site. Or maybe a property that gets flooded frequently and at times is "underwater". A rental property that could be almost worthless would be one that butts up against an extremely loud and smelly manufacturing facility. There are plenty of properties that really do not make good rental investments.

What is the Best Location?:
So that leads us back to location. Again, from a rental standpoint you want a property that will be 'liked" by as many people as possible. You also want a property that is going to be "seen" by as many people as possible. Why? Because the more people that see it, or know that it is available, the faster you will likely get it rented. At the same time, most people usually do not want to live on a busy street, especially if they have children. So where is there a lot of traffic that is not on a commercially busy street. There is only one place that fits that criteria in almost every community.... near a school. Schools are traffic magnets for short periods of time each day and yet many are not on commercially busy streets, they are buried in the middle of neighborhoods. That doesn't mean that properties that are not located near a school will not rent. However, given a choice, the property near the school will normally rent faster because it will get more exposure.

What Amenities to look for:
Another thing to keep in mind when selecting a property, strictly for rent, is not to impose your own personal likes and dislikes into the decision process. Try to be objective from a renters point of view. You may like two story homes, you think they look cool and usually on a per square foot basis they are cheaper. From a tenants standpoint they may not be as great. For one thing older tenants will not climb stairs. Many parents with infants would like to stay away from stairs as well. There are many medical disorders that may prevent someone from climbing stairs frequently no matter what a persons age is. Consequently buying a two story home may put constraints on who will rent from you. Age restricted communities pose a similar problem. When you buy in an age restricted community, you are really limiting who can rent from you. Here is a pretty safe bet. Most tenants would enjoy covered parking especially in a city where the temperature can reach 120 degrees in the summer. So either a car port or a garage is a good thing to have. We haven't had any tenants NOT take a property because it had a garage or carport, but we have had many not take a property because it didn't.

Imposing your Likes and Dislikes into the decision process:
Let's go back a second about imposing your likes and dislikes. Frequently an owner will tell me how great their property is because it is one of just a few in the entire complex that sits right next to the pool. Unfortunately, there are just as many people, maybe more, that would not want to be next to the pool with all the noise, loitering, and people that can see in at you just as easily as you can see them. Or how about the owner who thinks his unit is better because it's on the second floor... you don't get the noise of someone walking on your ceiling like you do on the bottom unit. We already went over the problem of stairs, how about roof leaks. Downstairs units are rarely affected by roof leaks, or roosting birds and their constant noise making. For the most part, there isn't anything that you think that is great that someone else could not have a problem with. The trick is to find a property that has as few objectionable things associated with it as possible.

LOCATION, LOCATION, LOCATION - Where is the best area of town to buy a rental property? The answer is simple anywhere you can make money. It really doesn't matter if you are in a statistically high crime area or not, as long as the price you pay for the property allows you the opportunity to meet your financial objectives. Everyone has to live somewhere.

Keep in mind I'm speaking from a strictly "rental" aspect. We are not talking about appreciation, maintenance, age, future resale, etc. When you bring in those other factors, along with your personal investing preferences, then where you buy may be more difficult to pinpoint. You see it's hard to foresee what any one neighborhood or market will do over the next 20 years or so. I can guarantee that all properties will get older and as they do will require more and more maintenance.

The two things that eat into rental profits are vacancy and maintenance. So buying a new property in a newer area of town that is near a school might be a good way to go. The problem here is that you pay a premium for this type of property and unless you either get a terrific price or you put a lot of money into your down payment, you could possibly have a negative cash flow every month.

PROPERTY TYPES - Another question we get constantly is which property type is better? Here again, any type where you can make money. Every property has it's advantages and disadvantages.

House - Your average house needs to have the lawn and or landscaping cared for. Houses are normally larger than most condos, which means there is physically more area a tenant can potentially damage. If your house sits vacant you are 100% vacant. Also, you normally continue to incur other costs with a vacant house. There are electrical, water, and landscaping requirements. However, you do have the advantage that you are not directly competing with all the apartments, condos, townhomes, and plexes on the market. Also, people who rent houses, as compared to other housing types, stay longer and move less.

Condo/Townhouse - These properties especially in a gated community can be difficult to rent. First of all the only people that are going to see your sign in the window, assuming your community even allows a for rent sign, are people that already live there. If it's a gated community, it's even more unlikely that a potential renter will see your sign. Why is signage such a big deal. Because most people drive the areas they want to live in, looking for available properties. Condos, have to compete with every apartment complex or townhome as well. On the plus side, an owner usually doesn't have to worry about the exterior of the property, and has a smaller interior to fix should it get damaged. Tenants in condo's however, as a demographic group, as compared to people that live in houses, have a tendency to move more often.

Plexes/Apartments - Duplexes, tri-plexes, fourplexes, multiple units and apartment buildings, you say! There really isn't much new property in this category, here in Clark County, for the most part, as compared to all other forms of construction. Consequently, these properties are normally older, and are found in the center of town. Your price per unit is usually less than compared to a condo, but your overall investment is much higher simply because of the size of the project. Depending on the building size, having one or a few vacancies may not kill you. Your overall cost per unit to maintain the building is less, you just have more maintenance to do. However, every major repair is initially much more cost intensive. When you replace the roof it might run $15,000 - $30,000. But on a per unit basis, it's a third of what it would cost to do a house.

The bottom line is that every property has it's advantages and disadvantages. If you buy an older property because it's cheaper than a new one, then you will probably be paying way more for maintenance. If you buy a new property, in order to avoid potential maintenance problems, but don't put much down when you purchase, you will probably be upside down in your rental income and mortgage payments. There is no perfect solution. It is what ever you are comfortable with. Just remember, you make your money when you buy.