Top 10 Features of a Profitable Rental Property
How to choose the best investment in the right neighborhood
Are you looking to purchase a residential rental property to boost your investment portfolio? Investment properties can be exciting and very rewarding if you make the right choice. But income and rewards aside, investing in real estate can be daunting for a first-time investor.
Real estate is a tough business and the field is peppered with land mines that can obliterate your returns. That’s why it’s important to do detailed research before you dive in so you’re on top of all the pros and cons of real estate investing. Here are the most important things to consider when shopping for an income property.
- Vet the neighborhood thoroughly—its livability and amenities are key.
- A neighborhood with a high vacancy rate is not a good sign.
- Know the area’s selling prices to get a sense of local market value.
- Research the average rent in the neighborhood and work from there to determine if buying a rental property is financially feasible for you.
Starting Your Search
Begin your search for a property on your own before bringing a professional into the picture. An agent can pressure you to buy before you have found an investment that suits you best. And finding that investment is going to take some sleuthing skills and some shoe leather.
Doing this research will help you narrow down several key characteristics you want for your property—such as type, location, size, and amenities. Once you’ve done that, then you may want a real estate agent to help you complete the purchase.
Your location options will be limited by whether you intend to actively manage the property or hire someone else to do that for you. If you intend to actively manage it yourself, you don’t want a property that’s too far from where you live. If you are going to get a property management company to look after it, proximity is less of an issue.
Top 10 Features to Consider
Let’s take a look at the top 10 things you should consider when searching for the right rental property.
The neighborhood in which you buy will determine the types of tenants you attract and your vacancy rate. If you buy near a university, chances are that students will dominate your pool of potential tenants and you could struggle to fill vacancies every summer. Be aware that some towns try to discourage rental conversions by imposing exorbitant permit fees and piling on red tape.
2. Property Taxes
Property taxes likely will vary widely across your target area, and you want to be aware of how much you’ll be losing. High property taxes are not always a bad thing—in a great neighborhood that attracts long-term tenants, for example, but there are unappealing locations that also have high taxes.
The municipality’s assessment office will have all the tax information on file, or you can talk to homeowners in the community. Be sure to find out if property tax increases are probable in the near future. A town in financial distress may hike taxes far beyond what a landlord can realistically charge in rent.
Consider the quality of the local schools if you’re dealing with family-sized homes. Although you will be mostly concerned about monthly cash flow, the overall value of your rental property comes into play when you eventually sell it. If there are no good schools nearby, it can affect the value of your investment.
No one wants to live next door to a hot spot of criminal activity. The local police or public library should have accurate crime statistics for neighborhoods. Check the rates for vandalism, and for serious and petty crimes, and don’t forget to note if criminal activity is on the rise or declining. You might also want to ask about the frequency of a police presence in your neighborhood.
5. Job Market
Locations with growing employment opportunities attract more tenants. To find out how a specific area rates for job availability, check with the U.S. Bureau of Labor Statistics (BLS) or visit a local library. If you see an announcement about a major company moving to the area, you can be sure that workers in search of a place to live will flock there. This may cause housing prices to go up or down, depending on the type of business involved. You can assume that if you would like that company in your backyard, your renters will as well.
Tour the neighborhood and check out the parks, restaurants, gyms, movie theaters, public transportation links, and all the other perks that attract renters. City Hall may have promotional literature that can give you an idea of where the best blend of public amenities and private property can be found.
7. Future Development
The municipal planning department will have information on developments or plans that have already been zoned into the area. If there is a lot of construction going on, it is probably a good growth area. Watch out for new developments that could hurt the price of surrounding properties. Additional new housing could also compete with your property.
8. Number of Listings and Vacancies
If a neighborhood has an unusually high number of listings, it may signal a seasonal cycle or a neighborhood in decline—you need to find out which it is. In either case, high vacancy rates force landlords to lower rents to attract tenants. Low vacancy rates allow landlords to raise rents.
9. Average Rents
Rental income will be your bread-and-butter, so you need to know the area’s average rent. Make sure any property you consider can bear enough rent to cover your mortgage payment, taxes, and other expenses. Research the area well enough to gauge where it might be headed in the next five years. If you can afford the area now but taxes are expected to increase, an affordable property today could mean bankruptcy later.
10. Natural Disasters
Insurance is another expense you will have to subtract from your returns, so you need to know just how much it’s going to cost you. If an area is prone to earthquakes or flooding, insurance coverage costs can eat away at your rental income.
Official sources are great, but you’ll want to talk to the neighbors to get the real scoop. Talk to renters as well as homeowners. Renters will be far more honest about the negative aspects of a neighborhood because they have no investment in it. Visit the area at different times on different days of the week to see your future neighbors in action.
Choosing a Property
The best investment property for beginners is generally a single-family dwelling or a condominium. Condos are low maintenance because the condo association takes care of external repairs, leaving you to worry about the interior. Condos, however, tend to garner lower rents and appreciate more slowly than single-family homes.
Single-family homes tend to attract longer-term renters. Families or couples are sometimes thought of as better tenants than single people because there is a perception that families could be financially stable and pay the rent regularly.