8 Things to Look for When Buying Rental Property
Investing in real estate is a smart move. It can be very profitable and it’s a rather safe long-term investment, at least compared to the roller coaster that’s known as the stock market. If you are looking for “buy and hold” properties—whether it’s one rental property to generate some extra income or many as part of a large real estate investment portfolio—it’s important to find the best properties that will generate more profitability.
To be a successful rental property investor, not just any house or multi-family complex will do. That is a mistake that many first-time investors make. You want to be careful about how you choose properties that are worth investing your hard-earned money in. You will want to look at the neighborhood, home values and rental trends, among various other factors, before you commit to buying any rental property.
Here are 8 things to look for when buying rental property:
1. Location, Location, Location
It is often said that these are the three most important words in real estate, and this sentiment is especially true if you are an investor looking for a good rental property to own. Study the neighborhood and understand what types of tenants you might attract. Consider your potential vacancy rate. Also look at local rental regulations, permits for rental conversions and other legal issues that could stand in your way in a given neighborhood.
A key part of the location is the schools around the house. A college town might mean that students dominate your tenant pool. If you are buying a family-sized home and want to attract family renters, then you will look at the local school district. Good schools attract better family tenants.
3. Property Taxes
You will also want to look at the property tax rates in any given state, county or city in which you are investing. This will affect your bottom line as long as you own the property, so know what your tax liabilities are going to be before you sign on the dotted line.
4. Vacancy Rate
Look at other rental listings and home sales in the market. If there is a lot available or the vacancy rates are seasonal, then that means there may not be enough much rental demand in that neighborhood. Vacancy is the worst thing for rental property owners, so you want to minimize your risk by buying in areas with higher demand and lower vacancy rates.
5. Rent Prices
Of course, you will want to analyze rental price trends in the area. As you run analytics on a property you are considering buying, you want to project the type of rent you can expect to collect from month to month and how much you might be able to raise it during the time you plan to own it. If the numbers don’t add up, then it’s not a worthwhile investment. You want to make sure the rent you can collect is going to cover all your ownership expenses (and then some)!
6. Future Development
Another important thing to look at when buying rental property is future development plans in the area. If the market is up-and-coming with lots of new development, new business and gentrification, then it could be a smart investment as property values are ultimately likely to go up. However, you also have to look at any influx of new rental properties or apartment complexes as potential competition for your listing. If a lot of cheap housing is being built, that isn’t necessarily a good thing for your rental prices or vacancy rate.
7. Target Cap Rate
Read our previous article about how to determine your target capitalization rate (“cap rate”) on a rental property, and why it is an important step to take. It’s a bit too complex to explain briefly here, so check out our other article for a more detailed look into cap rate formulas and practice.
8. Other Factors
You will want to look at a variety of other factors when searching for the ideal rental property:
- Crime Rates
- Natural Disasters
- Property Insurance Costs
- Neighborhood Amenities (parks, dining, entertainment, public transportation, etc.)
- Job Market
The important thing to remember is that a buy and hold property is a long-term investment. Whether you intend to own it for a few years or for the rest of your life, you have to make smart decisions about when, where and how you buy your rental properties. When you do this, you will be a more successful real estate investor. The best properties will bring you the best profitability.
At PropertyLark, we run detailed analytics on every property we buy and, as a member of our elite home buying network, you have access to these cutting-edge analytics tools that will help you get the most out of your rental property investments or fix and flip investments. To see if you qualify for our network, click here and fill out our buyer contact form and brief investor questionnaire.