10 Items to Look For In a Profitable Rental Property
Have you ever thought about owning a profitable rental property? There is a lot of work involved that may be daunting as a first-time investor. Let’s take a look at 10 things to consider when you are looking for income properties. This can help you understand what exactly makes a rental profitable.
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The most important thing to remember is to take an unbiased approach to all the properties and neighborhoods within your investing range. Don’t let yourself get emotional about this decision.
Do you intend to actively manage the property as a landlord or hire someone else to manage it? If you intend to manage the rental yourself, you probably don’t want a property that’s too far away from where you live. If you are going to get a company like EverStar to look after it for you, the properties proximity will be less of an issue.
Let’s take a look now at the top 10 things you should consider when searching for a profitable rental property.
- Neighborhood: The quality of the neighborhood in which you buy will influence both the types of tenants you may attract and how often you face vacancies. For example, if you buy in a neighborhood near a university, the chances are that your pool of potential tenants will be mainly made up of students and that you will face vacancies on a fairly regular basis (during summer, when students tend to return back home).
- Property Taxes: Property taxes are not standard and, as an investor planning to make money from rent, you want to be aware of how much you will be losing to taxes. High property taxes may not always be a bad thing if the neighborhood is an excellent place for long-term tenants, but the two do not necessarily go hand in hand. The town’s assessment office will have all the tax information on file.
- Schools: Your tenants may have or be planning to have children, so they will need a place near a decent school. When you have found a good property near a school, you will want to check the quality of the school as this can affect the value of your investment. If the school has a poor reputation, prices will reflect your property’s value poorly. Although you will be mostly concerned about the monthly cash flow, remember the value of your property overall does come in to play when you eventually go to sell it.
- Crime: No one wants to live next door to criminal activity. Go to the police or look online for accurate crime statistics for various neighborhoods, rather than asking the homeowner who is hoping to sell the house to you. Items to look for are vandalism rates, serious crimes, and petty crimes. As your REALTOR what the growth in the area is like. You might also want to ask about the frequency of police presence in your neighborhood.
- Job Market: Locations with growing employment opportunities tend to attract more people – meaning more tenants. To find out how a particular area rates, go directly to the U.S. Bureau of Labor Statistics. If you hear about an announcement for a new major company moving to the area, more than likely, workers will be coming to the area. However, this may cause house prices to react (either negatively or positively) depending on the corporation moving in. The main point here is that if you would like the new corporation in your backyard, your renters probably will too.
- Amenities: Check the potential neighborhood for current or projected parks, malls, gyms, movie theaters, public transport hubs and all the other perks that attract renters.
- Building Permits and Future Development: The municipal planning department will have information on all the new development that is coming or has been zoned into the area. If there are many new condos, business parks going up in your area, it is probably a good growth area. However, watch out for new developments that could hurt the price of surrounding properties by, for example, causing the loss of an activity-friendly green space. The additional condos and/or new housing could also provide competition for your renters, so be aware of that possibility.
- Number of Listings and Vacancies: If there is an unusually high number of listings for one particular neighborhood, this can either signal a seasonal cycle or a neighborhood that has “gone bad.” Make sure you figure out which it is before you buy in. You should also determine whether you can cover for any seasonal fluctuations in vacancies. Similar to listings, the vacancy rates will give you an idea of how successful you will be at attracting tenants. High vacancy rates force landlords to lower rents in order to secure tenants. Low vacancy rates allow landlords to raise rental rates.
- Rents: Rental income will be the bread and butter of your rental property, so you need to know what the average rent in the area is. If charging the average rent is not going to be enough to cover your mortgage payment, taxes and other expenses, then you have to keep looking. Be sure to research the area well enough to gauge where the area will be headed in the next five years. If you can afford the area now, but major improvements are in store and property taxes are expected to increase, then what could be affordable now may mean bankruptcy later.
- Insurance: Insurance is another expense that you will need to subtract from your returns, so it is good to know just how much you will need to carry.
Talk to renters as well as homeowners in the neighborhood. Renters will be far more honest about the negative aspects of the area because they have no investment in it. If you are set on a particular neighborhood, try to visit it at different times on different days of the week to see your future neighbors in action.
The Physical Property
In general, the best profitable investment property for a beginner is a residential, single-family dwelling or a condominium. Condos are low maintenance because the condo association is there to help with many of the external repairs, leaving you to worry about the interior. Because condos are not truly independent living units, however, they tend to garner lower rents and appreciate more slowly than single-family homes.
When you have the neighborhood narrowed down, look for a property that has appreciation potential and a good projected cash flow. For appreciation potential, you are looking for a property that, with a few cosmetic changes and some renovations, will attract tenants who are willing to pay out higher rents. This will also serve you well by raising the value of the house if you choose to sell it after a few years.
As far as cash flow, you are going to have to make an informed guestimate. Take the average rent for the neighborhood and subtract your expected monthly mortgage payment, property taxes (divided by 12 months), insurance costs (also divided by 12) and a generous allowance for maintenance and repairs. Don’t fool yourself by underestimating the cost of maintenance and repairs. You’ll only pay for it in the end. If all these figures come out even or, better yet, with a little left over, you can now get your real estate agent to submit an offer. Also, make sure you get the best mortgage rate if you are looking to invest in a rental property and talk to several lenders.
When you do find your perfect, and hopefully profitable, rental property; keep your expectations realistic and make sure that your personal finances are in a healthy enough that you can wait for the property to start producing cash flow. Real estate investing doesn’t start with buying a rental property – it begins with creating the financial situation where you can buy a rental property.
When you are ready, we are here to help you. Whether it is to help you find that perfect rental investment property or manage the property for you so you can just sit back and relax, we are here for you. 509-735-4042