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Buying a rental property is an excellent way of investing your money and generating a consistent stream of income. Rental properties can be extremely lucrative investments with high profitability and the potential to build considerable wealth in the long run.
However, choosing a suitable rental property can be complicated and is often not as straightforward as new investors may be inclined to believe.
There are a huge number of factors to consider when choosing the right rental property for you. By considering each of the points listed in this article and carrying out extensive research, you should be able to make an informed decision and invest your money wisely in a rental property that will generate consistently positive cash flow.
Let’s start by thinking about the different factors that separate good rental property investments from not-so-good ones.
The first thing you should consider when looking for a good rental property is the location. To establish whether a property is located in a desirable and profitable area, you’ll need to look at a few different factors:
The Neighborhood and Local Amenities
The neighborhood you choose to buy your property in will have a direct effect on the tenants you attract. For example, a residential area with a good school, daycare, and leisure facilities is likely to attract families with children, whereas buying a property close to a college or university campus is more likely to attract students.
The local amenities of the area will also have a huge impact on the desirability of the area and the number of tenants looking to rent there.
In general, look for neighborhoods with as many good local amenities as possible to maximize your pool of potential renters and secure consistent cash flow. Key things to look out for include schools and childcare centers, grocery and drugstores, gyms, leisure and recreation facilities, local parks, hospitals, and restaurants.
Carrying out some research into the neighborhood and will give you a much better understanding of whether or not your property is likely to be a good rental investment.
Property Taxes or Rental Permits
The next thing to consider when finding a good rental property location is the implementation of rental permits or taxes in the area.
Property taxes vary widely from state to state and are charged based on the value of your property. Some states charge considerably higher taxes than others, while some waive property taxes completely. Tax information for any area can be found by contacting the local municipality assessment office, or with some online research.
Some areas also impose expensive permits on renters or rental property owners. This might be to deter the development of large rental complexes or simply to generate more income for the local governing body. Be sure to identify these early on by speaking to local residents or council members.
High taxes or permit costs are not necessarily indicative of a bad rental property, particularly if you’re buying in an area that’s in high demand and has good overall profitability. However, it’s always best to identify these costs as early as possible to ensure you’re investing your money wisely.
It’s also vital that you take into account the local crime rates before investing in a rental property. Areas with high crime rates will typically offer lower rental prices and insurance costs may be higher than in other low-crime areas.
The FBI’s online Crime Data Explorer lets you see the current crime trends in the area and how these have changed over the last decade. If crime rates are increasing in the area, you might find that rental properties are less in-demand and your profits may suffer substantially as a result.
The Local Job Market
If the property’s location has a growing job market, it’s likely that more tenants will be attracted to the area, minimizing the risk of long vacancy periods. You can check the area’s job availability rates using the online Bureau of Labor Statistics data provided by the US Government.
It’s also worth checking for any upcoming business developments in the area or any large-scale companies that are going to be moving in or out of the area in the coming years. This could cause property and rental prices to increase or decrease, depending on the company and how these new developments are perceived by residents, and how they might impact other local amenities such as green spaces or local traffic.
Speak to local residents and check out any online forums that might shed some light on the overall response to any new business developments and how these are likely to impact the area.
As well as business developments, it’s also important to find out about any upcoming developments in terms of residential properties, road or rail works, new universities or schools, improvements to transport links such as new airports or train stations, and anything else that may positively or negatively impact your investment.
Extensive construction work taking place nearby may deter renters, so it’s also important to bear this in mind and consider how long the development may take to complete. Again, do plenty of research and try to find out how current residents feel about any upcoming developments.
Local Rental Market
By looking at the average rental prices and the number of rental properties in the area, you can better understand how much renters will typically pay and the type of properties that are in high demand.
The rent prices you charge will need to align with those of the local area while also covering any outgoings such as mortgage payments, taxes, insurance, and property management costs. Look out for any projected tax increases or dips in the property market to ensure that you are making a secure, reliable investment.
Other Concerns or Risks
In addition to all of this, there are some other location-based risks or factors that you must consider before buying any property. Most of these are linked to natural disasters or events that are likely to be out of your control.
Is the town or city built around a river? If so, is the river liable to flooding? Has this happened in the past? What contingencies or preventative measures are in place to prevent this from happening again?
Is the area prone to earthquakes, hurricanes, wildfires, or extensive droughts?
Each of these things should be taken into consideration and are likely to have considerable impacts on your insurance costs and the amount you are able to charge in rental payments.
The Property Itself
If, after carrying out this initial research, the location ticks all of the necessary boxes, the next thing to look at when identifying a good rental property is the property itself.
Overall Condition and Amenities
If you’re looking for a rental property investment that requires minimal repairs or refurbishments, you’re going to want to find a property that’s already in good condition and has all of the necessary amenities such as a working kitchen and bathroom, hot water, and a central heating or air conditioning system.
If, however, you’re looking for a lower-cost property that needs some initial work or general maintenance, you could look for a property that’s in less-than-optimal condition and then factor any decorating or construction costs into your overall budget. For some, this proves more profitable in the long run. However, these kinds of projects are often in high danger of running over budget and over schedule, so be sure to go into this with your eyes open to all of the potential risk factors.
Whichever route you are looking to take, always have an independent inspector check the property before the purchase to ensure there is no structural or integral damage to the property that is likely to impact your insurance costs or future expenditure.
Reasonably Priced and Within Budget
Even if you think you’ve found the perfect rental property for you, shop around and make sure you’re getting a reasonable price in comparison to other similar properties in the area. Stay within your budget and if possible leave a little contingency money for any unexpected costs or repairs.
Property Management Options
You should also consider what property management options are available to you. Most landlords choose to utilize the services of a property management company to handle any basic maintenance or issues such as lost keys or minor damages caused by leaks or faulty appliances. These companies will also typically take care of maintaining any communal areas such as outdoor spaces, gyms, or entryways.
You’ll need to find out what services are available with the property and then factor these costs into your overall budget.
Positive Cash Flow and Good ROI
Once you have found a good rental property in a suitable location, you should then establish the potential profitability of the property to understand whether this is likely to be a good, lucrative, long-term investment.
Cash flow is arguably the most important factor when considering any new rental property investment. Cash flow refers to the difference between your monthly rental income and monthly rental outgoings. It essentially tells you how much profit you should make each month as long as the property has a tenant.
We highly recommend using this online rental property calculator to identify your projected cash flow.
Simply input your basic outgoings including purchase price, down payment and interest rates, as well as your rental income and any expenses, and the calculator will tell you your monthly cash flow and net operating income. The calculator also determines your ROI (return on investment), or cash on cash return. This is calculated by taking the annual net income and dividing it by the total cash investment.
Ideally, you want to aim for an ROI of 8% or higher to ensure good, consistent growth potential.
When each of the different factors and risks is laid out in detail, rental property investment may seem overwhelming or complicated.
While there are lots of things to consider and it is vital that you carry out thorough research before making any large investment, when done well, investing in rental property is undoubtedly one of the best ways of generating a consistent stream of income and building your long-term wealth,
Simply follow the guidance laid out in this article to ensure you are making a well-informed and sensible decision when it comes to investing in rental property.
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