We live in one of the best towns in America. Outdoor Magazine recently named our town Number 7 on their annual Best Places to Live list. Yahoo Finance named Flagstaff as one of the Happiest Cities in America. Countless sources have recognized Flagstaff as a highly desirable place to live. For those of us who call Flagstaff home, none of that is surprising.
Being such a desirable place to live also makes Flagstaff an ideal place for owning real estate investment property. Top employers include Northern Arizona University, W. L. Gore and Associates and Flagstaff Medical Center. NAU’s large student population coupled with the on-campus housing shortage also brings an influx of students in need of temporary housing.
What should a real estate investor look for when purchasing his/her next rental property in Flagstaff?
Cash Flow: It may seem obvious, but the most important factor in purchasing your income property is to work the numbers. Will this property contribute to your bottom line? Your cash on cash return determines the answer to that question. That is not determined by the market value of the property, but rather how much cash came out of your bank account to purchase the home. For example, if your rental income less expenses equals $200 per month, you are earning a positive cash flow of $2,400 per year. If you used $40,000 as your down payment, your cash on cash return is six percent.
Determining Rents: Looking at the market value of rents for similar properties in the neighborhood is your best determining factor. As a real estate investor myself, I use a general rule of thumb to determine if the property is a good investment value. If the rents I can charge are a minimum of one-half of one percent of the purchase price, the property passes my first-look test to determine if I am even interested. If I can get anything more than one-half of one percent, it has potential to be a great rental property.
Diversify: As with stock portfolios, it makes sense to diversify your real estate holdings as well. My husband and I own rental properties in both Flagstaff and the Valley. We have diversified by purchasing single-family homes, townhomes and condos in one or both markets.
Owning in more than one market, or at the least more than one neighborhood, can help you minimize risk over time. When one area has an issue that is out of your control, it can affect rentability.
If you’re just getting started in the investment property market, it can be a good idea to start with a vacation home that you rent out as a short-term rental when you’re not personally using it. If you decide to use this strategy, be sure to know local laws and ordinances regarding short-term rentals. This can be a solid strategy to help you get started in owning an investment property while also helping you gain personal enjoyment from your investment as well.
Tenants: When purchasing rental property in a college town, the closer to campus you are, the more likely you will need to rent to students. Make sure you are well covered in insurance and that you have clearly stated policies and penalties in your lease regarding any issues you want covered. Are you going to allow pets? If not, what is the penalty if a tenant does move in with a cat or dog that is not a certified assistance animal?
When evaluating tenants in the beginning, it’s important to know how to read a credit report. It’s not just about their FICO score. How many late payments do they have, and is it with more than one creditor? Were there special circumstances that went along with late payments or charged off amounts? Are those circumstances still a factor? Sometimes your best tenants don’t necessarily have the best credit scores.
Flagstaff is a great market for real estate investors. Right now, rates are still incredibly low and more financing options have opened up to investors over the past year. We continue to see appreciation in Flagstaff at a healthy pace, and most economic experts are predicting that trend to continue. If you want to jump into the real estate investment market, or expand your portfolio, now is the time. FBN
Jacki Tait is a professional real estate agent with Russ Lyon Sotheby’s International Realty in Flagstaff and leads a team of agents in the Valley. Tait is a real estate investor and vacation hom owner, specializing in helping her clients build their own real estate portfolios. She can be reached at 928-714-7244.