Today, many people are looking to invest in rental properties as a way to create a steady stream of income, build wealth, and secure their financial future. The problem is that most people don’t understand what buying rental property entails or what to look for in a rental property before investing. As a result, many beginner real estate investors make poor investment decisions that lead to low returns or even heavy losses.
Trying to find the right investment property can be daunting, especially if you are a first-time investor. You need to find a rental property that will work for both you and your target tenants. If you are considering buying your first rental property and want to give yourself the best chance of making a great investment, then you’ve come to the right place. In this blog, we are going to look at what makes a good rental property. Our goal is to help you minimize your risk while maximizing your profit when buying investment property.
Here are the 10 most important things to look for when buying a rental property. Before you jump into them, note that you’ll find that some of the characteristics have to do with the location of the rental property rather than the rental property itself. That’s because when considering what to look for in a rental property, you absolutely need to think about its surroundings! Without further ado, here’s our list:
What to Look for in a Rental Property
1. A Desirable Neighborhood
Location is the most crucial aspect of a good rental property. And since location doesn’t change, make sure you choose wisely. What renters want is a location that can offer them a quality lifestyle. A good rental property is located near good schools, adequate transport systems, shopping centers, restaurants, internet access, water availability, movie theaters, gyms, and other essential amenities. If the location can offer these, then the tenant will probably want your rental to be their long-term residence. Rental property in a desirable location will also attract higher-quality tenants who may be willing to pay higher rent for the area. Make sure you research the location of your rental property before you purchase it. Tour the neighborhood and check out whether it has public amenities that attract renters.
Related: How to Choose the Right Location for Rental Properties
2. Low Crime Rates
No renter wants to live in a crime-ridden area. However, places that are hot spots of criminal activity are not always obvious. You will need to conduct some investigation into your target area to find out whether the income property you want to buy is in a safe neighborhood. You can check accurate crime statistics with the local police or public library. Note whether the crime rate is moving up or down and the frequency of a police presence in the area. Most tenants will check how secure a place is before signing a lease agreement. So, don’t invest in an area that is unsafe.
3. A Flourishing Job Market
When thinking of what to look for in a rental property, you should also consider the job market. These areas are usually major business hubs and have several tourist attractions. Areas with growing employment opportunities will attract more people to rent homes there. Ideally, people want to stay close to their place of work. As such, rental properties in areas with ample employment opportunities tend to be more profitable.
Moreover, renters with stable jobs are more likely to pay their monthly rent on time and stay long-term. If a major company is announced to be moving to an area, workers looking for a place to live will flock to the area. With an increased demand for rental properties, house prices may rise. You can check how a particular area rates for job availability with the U.S Bureau of Labor Statistics.
4. Low Vacancy Rate
When looking for a profitable investment property, you should also include the vacancy rate in your checklist of what to look for in a rental property. Generally, it’s better to buy income properties in neighborhoods with low vacancy rates. If a neighborhood has a high number of vacancies, it may mean that the area is declining, has too many listings compared to the demand (intense competition), or has a seasonal rent cycle. Whichever the case, it may force landlords to lower rental rates to attract renters. Conversely, low vacancy rates allow landlords to increase rents.
5. Low Insurance Costs
Another important thing to look for in homes for sale is the insurance costs. When it comes to investing in rental properties, insurance costs can eat into your profits. You should determine whether the area you are interested in is prone to natural disasters like earthquakes, tornadoes, hurricanes, sinkholes, floods, etc. In this case, the rental property may not be worth it due to high insurance rates. Make sure you know how much it’s going to cost you on insurance before you invest.
6. Good Property Condition
There are many downsides to investing in a fixer-upper when it comes to rental properties. Ideally, you want to buy a rental investment property with a quick turnaround. An income property that isn’t rent-ready and needs many repairs could eat into your annual profit before the first tenant enters the house. However, you shouldn’t completely dismiss an investment property that seems perfect in all other aspects except for some minor repairs. Even if it needs some work before it is ready for occupancy, it can still be a lucrative investment. Just keep in mind that you will need to make the repairs quickly and cost-effectively. Always hire a professional to do a rental property inspection to give you a detailed report on the condition of the property.
7. Reasonable Property Taxes
Just like insurance, high property taxes will eat into your profits. Therefore, when considering what to look for in a rental property, you should also keep in mind the cost of property taxes. Low taxes is one of the profitable features of an investment property since it will allow you to keep more of your monthly rental income. Higher property taxes are typically found in metropolitan areas while lower taxes are mostly found in rural areas. In some areas, property investors have higher property taxes than owner-occupants. Be sure to check the local tax information before making an investment.
Related: The Hidden Costs of Owning Rental Property and How to Mitigate Them
8. A Good Rental Rate and Return on Investment
When buying rental property, it must make financial sense. Generally, a rental property should abide by the 1% rule. This rule of thumb states that the monthly rental income should equal or be greater than 1% of the total purchase price of an income property. Also, make sure that your target investment property will bear enough rental income to cover your taxes, insurance, mortgage payments, and other expenses. You can determine the expected rental income by evaluating the current rental rates of similar properties in the area.
Related: How to Create Rental Property Income: 12 Tips
In addition to the rental rate, the rental property of your choice should also promise a good return on investment (ROI). Be sure to calculate real estate ROI metrics like cash flow, cash on cash return, and cap rate.
If you want to be able to determine the kind of rental income and ROI you can get from a rental property quickly to ensure it’s what you’re looking for, use Mashvisor’s rental property calculator.
9. Future Developments
Apart from the profitability of an area at the moment, you should also consider how profitable the area will be in the future. Planned development projects like infrastructure development, parks, and malls often show that the area has a high economic growth rate. Investment properties in such areas are likely to appreciate in value faster. Therefore, you will be able to make a good profit if you decide to sell. Developments also mean that there will be more jobs and, consequently, more potential renters.
10. Proximity to Your Home
Managing rental properties can be quite demanding. You need to be constantly available to deal with maintenance issues and concerns raised by tenants. If you are an absentee landlord because you live far away, you may not be able to find out and resolve problems quickly. This can cause problems to escalate and become even more expensive to deal with.
If you are a beginner real estate investor, staying near your rental property would make it easier for you to manage it and save the money you would have used on professional property management. You may, of course, invest out of state and choose to hire a property management company to do the management on your behalf. However, you should carefully consider the property management costs to see if it is well worth it.
The Bottom Line
Investing in rental properties can be a lucrative move. However, to mitigate risk and make good profit, you need proper planning and knowledge of what to look for when investing in a rental property. Without this knowledge, you are likely to make common investment mistakes that could obliterate your returns. These 10 tips will hopefully help you find a good rental property for investment. Once you make sure the location and the rental property are profitable, you are ready to invest.
To make your work much easier, make sure you use Mashvisor’s real estate investment tools for accurate market analysis and investment property analysis.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.