Here’s a statistic that may surprise you; Phoenix added over 13,000 residents in 2021, second behind only San Antonio in population growth among major American cities. The Phoenix area is booming, which means it’s a great time to think about buying rental property in Arizona’s largest city.
The only trouble is, you aren’t the only person thinking about buying investment property in Phoenix.
You’ll be competing with hundreds of other people who are buying homes in Phoenix with the idea of renting them out. With that in mind, you’ll have to think long and hard about how you’ll buy a property that gives you a great chance at a return on investment.
The article below contains a guide to buying a rental property in the Phoenix area.
You can use the tips in this article to prepare for your purchase, identify potential properties and make a final decision on a property. Continue reading to learn more about the process of buying investment property in and around Phoenix.
Figure Out Your Financing
When you’re thinking about buying a rental property, the first thing you need to figure out is how you’re going to pay for it. If you can afford to be a cash buyer, you’ll have a lot of advantages over buyers who are using financing.
If you are going to use financing, you’ll likely need to make sure you have a 20% downpayment stashed away. It’s very difficult to buy a rental property without first securing at least 20% of the purchase price for a down payment.
Once you’ve secured that downpayment, you’ll have to shop around for different mortgages. You can do a 15-year mortgage or a 30-year mortgage, and each mortgage may have a different interest rate.
At the time of writing, the average interest rate on a 30-year mortgage in the US is around 6%. You may be able to get a better mortgage rate than that if you have a good credit score or if you put down a larger downpayment.
Think About the Type of Renter You Want
Do you want to rent your property out to single tenants who won’t require much space, or would you rather rent to families?
The type of renter you want will play a role in determining what type of house you buy. You should also think about location. Do you want to rent out to people who live in the city, which might mean more turnover?
Alternatively, you could buy a home in one of Phoenix’s more family-centric neighborhoods outside of downtown. This type of rental property might attract more families who would stay in your house for a longer period.
Perform a Rental Analysis on Potential Properties
A rental analysis will help you determine how much you’ll be able to charge for rent, and whether or not that will cover the cost of your mortgage. You can perform a rental analysis by adding up the total costs of owning your home including the mortgage payment, potential maintenance issues, property tax, and home insurance.
These are your expenses. You should also factor in the cost of paying a property management company to find tenants and communicate with renters. You can then look at comparable rental properties in the area to determine how much you might be able to charge for rent.
Be sure to look at properties that have the same number of bedrooms and bathrooms as the properties you’re considering buying. You should also look for properties that have around the same square footage and similar amenities such as a backyard.
Finally, you can add up all the expenses and compare them to your potential rental income to see if the rental income will bring in more money than you’re paying each month for the property. You should also factor in a 10% vacancy rate.
That means your property may be vacant about 10% of the time, which means you won’t be able to rely on rental income to cover your mortgage payment.
Decide if You’re Going to Use a Property Management Company
A property management company can help you rent out your investment property. Unless you have a lot of free time on your hands, you’ll likely be too busy to find tenants, deal with maintenance issues, collect rent, and communicate with tenants.
If you’re going to hire a property management company to take care of your investment, you’re going to have to pay them a percentage of the rental income.
The property management fee can be anywhere from 6-12% of the monthly rental income. You’ll have to account for this expense when calculating how much cash flow you’ll generate each month from your rental property.
Don’t Buy a Property That Needs a Lot of Work
If you don’t have a lot of money to spend on a rental property, you might be tempted to buy a property that needs work. These properties are usually priced at a lower price point than properties that are move-in ready.
The problem with properties that need work is that you’ll have to fix the property before you can start generating rental income. There’s no telling how long the renovation process could take, which means you could be losing money for a while.
Reviewing the Top Tips for Buying a Rental Property in Phoenix
Now that you’re prepared to start buying a rental property in the Phoenix market, you can start securing your financing and seeing properties in person. Once you’ve decided to start seeing properties in person, you’ll likely want to partner with a real estate company to find high-quality houses.
You can start this process by getting in touch with the expert real estate team at Mahody Realty.