Buying a Rental Property in Rochester, MN
Why should you buy a rental property in Rochester, MN?
Buying a rental property in Rochester, MN can be a great decision to build wealth, receive monthly cash flow, build equity and obtain from some great tax benefits. However, it's important that you take the time to learn about the many parts of running a successful rental property.
Rochester, MN is a great place to own a rental due to the economic stability the city brings due to the Mayo Clinic and other employers. The Destination Medical Center (DMC) has really promoted Rochester as a city for present and future investment.
Benefits of buying a rental property in Rochester, MN
Value Appreciation | It's expected that in the long term, the value of a property will go up in value. One of the factors that will cause this is inflation. The appreciation of homes in the last several years have increased significantly but a normal year to year appreciation you can expect is anywhere from 3-5% as a conservative measure.
Cash Flow | Every month when you own a rental property that's occupied, you should expect to make a profit every month after all expenses are paid. Every property has a different amount of cashflow. This is one of the best benefit of owning a rental property.
Principle Reduction | Unless you buy a house in cash, you will need to take out a mortgage on your rental property. Every month, as you make your mortgage payment, you will be paying off a portion on of the mortgage/loan which will become equity that you have on your rental property.
Tax Benefits | One of my favorite benefits of owning a rental property are the tax benefits. Some of the items you can benefit from a tax side of things are expenses related to the rental, property depreciation, maintenance, improvements, etc.
What Do You Need When Buying A Rental Property in Rochester, MN?
Buying a rental property is similar to buying a house for you to live in. There are however a couple of differences. You will be required to put in 20% downpayment. There will also be closing costs that will need to be budgeted for. Finally, you will need to consider having some money budgeted for improvements, maintenance and other miscellaneous expenses.
The interest rates will be higher than the market rate for an owner-occupied property. Property taxes will also be higher when the property you buy will be used as a rental.
Steps to Buying a Rental Property in Rochester, MN
Finding the Rental Property | Analyzing properties, working with a Realtor, networking etc.
Property Acquisition | Buying the rental property, getting a loan, negotiating, inspection etc.
Getting Rental Property Ready | Remodeling, improvements, rental certificate etc.
Tenant Placement | Marketing the property, tenant due diligence, signing lease etc.
Property Management | Collecting rents, managing maintenance requests, accounting etc.
How do you buy a rental property in Rochester, MN?
To buy a rental property you should connect with reliable team of professionals. It's critical to work a real estate agentthat owns rental properties or has owned them in the past. It's important to have a lender that specializes in rental property loans and who can guide you through the process. Having a home inspector who can identify issues specific to owning a rental property is critical and necessary to be successful.
How do you analyze a rental property in Rochester, MN?
1% Rule |The one percent rule is a quick screening formula that you can use when you're sorting through different properties. It's meant to just be a first-pass eliminating tool, intended to help you narrow your search criteria. It is not meant to be the final word on buying a property.
Capitalization (Cap) Rate | measures your unleveraged cash flow relative to the price of the property. In other words, it tells you whether or not you're buying a property for a good price.
Cap rate equals annual net operating income divided by the total acquisition price. (That’s the purchase + initial repairs to make it rent-ready for the first tenant).
50% Rule | The 50% rule of thumb says that over the long term, your property's operating costs will consume roughly half your gross rental income. The costs do not include principal and interest portion of your mortgage payment.
Cash on Cash Return | Measures the income from a rental property relative to the money you paid out of pocket to purchase the home. Keep in mind that this formula only measures how much money you have paid out of pocket, rather than how much the property is worth.
Cash Flow | is the difference between your rental income and your expenses. Similar to your personal finances, you can increase cash flow by increasing rental income, lowering your expenses or both.
Operating Expenses
Repairs: These are unplanned one-time costs, like fixing a broken dishwasher.
Maintenance: These are routine tasks, like gutter cleaning or lawn mowing.
Capital expenditures (CapEx): These are occasional, big-ticket expenses like replacing the roof, siding, windows, gutters and HVAC.
Management fees: You're buying an investment, not a job. You might decide to manage the property yourself, or to hire a property manager, someone whose job is to collect rent and coordinate contractors. Either way, run the numbers as though you're paying a manager. Property management fees can be anywhere from 7% to 10% depending on the management services you will be receiving.
Classification of Rental Properties in Rochester, MN
Types of Neighborhoods & Property Classes To Consider Buying a Rental Property in Rochester, MN
Class A | Properties tend to be new-construction or recently renovated properties in great
condition. Class A neighborhoods are considered stable, desirable areas that tend to attract
higher-income tenants with good credit. Rule-of-thumb: if there's a Starbucks, CostCo or
Panera Bread nearby, it might be a Class A neighborhood.
Class B | Properties are a little older, but still in decent condition. They're generally well
maintained. Class B neighborhoods are considered to be "okay," middle-of-the-road
neighborhoods. Rule-of-thumb: if most of the neighbor's cars are around 10 years old, the
neighborhood might be Class B.
Class C | Many of these properties have lots of deferred maintenance issues. Class C neighborhoods are considered working-class neighborhoods and tend to attract lower-income tenants who might
have credit problems. Rule-of-thumb: if you see several payday loan, title loan, and check
cashing businesses in the area, it might be a Class C neighborhood.
Class D | Properties in this neighborhoods are straight-up war zones. These are the places where the cops won't go, not even in the daytime. There are often no businesses nearby. The storefronts are
boarded-up and vacant. There are shootings in broad daylight. These are genuinely dangerous
areas. Avoid Class D neighborhoods.
City of Rochester, MN Rental Housing Information Needed When Buying a Rental Property in Rochester, MN
To get information about applying for rental property certificate or getting more infomraitno about being a landlord here in Rochester, MN click here.