When it comes to residential rental real estate investments, the profitable ones are just as numerable as the money pits. A single unidentified snag can easily obliterate what would’ve been a hefty return. This is why investors need to know the right features to look for as they real estate shop.
The Hunt Is On
It’s best to start searching for a property solo. Why? Agents often have their own agendas of making a sale, and that agenda rarely considers whether a property is an actual good investment for the future landlord.
That’s simply not a pressure investors need in hunting the best property location, size, and features for rentals. Speaking of location, don’t forget to consider whether this will be a self-managed project or contracted out to a property manager. If the latter is the case, proximity to the actual investor won’t be as big of an issue.
Most first-time investors go with single-family and condos as an initial investment. Single-family homes attract families and couples who are more financially secure and likely to be long-term tenants. With condos, appreciation is slower, but investors have less upkeep since the condo association typically covers external repairs.
In any case, the ultimate residential property investor goal is a property with good cash flow and appreciation potential.
Profitable Property Features
Here are nine profitability boxes investors need to be sure a property checks:
It’s prudent to check the municipality for any red tape, such as to permit fees, that could impede profits. Investors also need to consider the demographics of a property’s neighborhood. This influences the type of tenants and vacancy rate for a particular property. Locations near college campuses, for example, will likely rent quickly but suffer vacancies during the summer. Meanwhile, tourist locations like beach rentals may face winter vacancies.
Check with the municipality’s assessment office to determine a potential property’s current tax info and any plans for future hikes. High taxes can quickly eat rental profits up, but don’t necessarily allow high taxes be a dissuading factor if the area is particularly attractive and has a high probability of collecting high rents from quality long-term tenants.
3) School System
Family-sized property investors need to consider the school system serving a potential property. This will be of great value to family renters and future buyers should an investor want to sell the property in the future.
4) Crime Rate
Quality, long-term renters don’t want to live in areas overrun with crime and/or that don’t have a reliable police presence. Check with neighbors to determine if there is a neighborhood watch and the strength of the local authorities. The public library should have crime stats for the neighborhood, which can also be used to gauge if activity is moving in an upwards direction or surrounding criminal activity is moving closer.
Strong rental properties are within locations with growing employment opportunities. Use the U.S. Bureau of Labor Statistics to check an area’s employment rates. Get ahead of curves by checking the news for big companies coming to town, which almost guarantees a flock of workers looking for affordable housing rentals.
6) Nearby Amenities
are important to almost all residents of an area. Renters want to be close to quality parks, gyms, childcare, libraries, transportation, eateries, and entertainment. Scope the area out. If the investor finds it too far off the beaten path or lacking amenities, then renters will likely feel the same.
Don’t forget to check for technology connectivity since it will likely be difficult for a property with poor cell phone service or internet connections to stay rented.
7) Future Developments
Check with the municipal planning department to see what developments are in the works for the future. Construction does mean growth, and growth means more rental opportunities. However, investors want to ensure that growth isn’t mainly competing housing opportunities or developments that are strongly opposed by the community, both of which could hurt a property’s ability to stay rented.
8) Listings, Vacancies, And Pricing
Research the average renter’s rate for the area and know how much the mortgage, taxes, insurance, and maintenance will cost for a potential property. If the tally isn’t congruent with profitability, then it’s the wrong property.
Do keep in mind that a good rule of thumb for a property’s pricing is that the investor should look for a property where they’ll pay less than 12 times the projected annual rent rate.
Don’t forget to look into the future, too, as to how a tax hike, adjustable interest loan, or other components would influence that profitability.
Low vacancy generally dictates higher rental rates, and high vacancy generally forces property landlords to lower rent to attract a higher renter volume. Areas with a high volume of listings need to be further investigated. It could just be a sign of seasonal cycles, but it could also signal a force to those low rental prices.
High insurance rates can easily kill what could’ve otherwise looked like a good return potential. Investors most certainly want to know all the property features that influence insurance premiums, such as a property’s proximity to a fire department. Keep in mind that area’s prone to natural disasters such as mudslides, fires, earthquakes, and floods typically require additional insurances if the property has a mortgage.