Just because you can turn a house into a rental property, that doesn’t mean you should. Some properties are well suited for renting, but it’s hard to make the numbers work on others.
If you’re just getting started in real estate investing, it’s imperative that you know how to separate the former from the latter.
Features of a Good Rental Property
Rental properties can make you wealthy. They can also ruin your finances and create a lot of unnecessary stress in your life. Though getting the right tenants in place is vital, ultimately you make your money on the day you purchase a property.
As you search for the most suitable investment property to add to your portfolio, think about the following aspects.
- Location
As you’ve probably heard many times by now, the three most important factors in a real estate transaction are location, location, and location. Stay away from properties in bad areas and give priority to those that are situated in a region that’s well established or clearly up and coming.
What makes a good location? Clearly, you want to avoid declining markets where property values are stagnant and people are moving out. Give preference to areas of town where property values are improving, people are investing money, and demand for housing is increasing.
Signs of a hot rental market include: lots of nearby amenities, good schools, growing job market, low crime rate, future planned developments, low rate of rental listings, and access to public transportation.
Nothing beats talking with people who are knowledgeable in your individual market. However, you can also put together some useful data by leveraging the Mashvisor Neighborhood Analysis tool.
- Neighborhood
If location refers to the city or zip code where a property is situated, the neighborhood is the specific street or subdivision where it sits. In other words, it’s the “micro” location that sits within the “macro” one.
A good neighborhood is crucial. Every city has streets or subdivisions where people pay a premium to live.
If you can find those places and gobble up rentals in them, you will be in a position to give prospective tenants access to in-demand locations that are otherwise available only to homeowners. Plus, you’ll probably get steady property value appreciation over time. It’s a win-win scenario.
If you’re looking at a specific site, a property management company in your city might be able to give you some insights into whether it would be a good buy. Green Residential, for example, offers free Houston property management rental analyses.
- Condition
It’s normal to go in and make a few upgrades or alterations to a property after you’ve acquired it. There are certain things you don’t want to mess with, however.
Foundation issues, water damage, and major system repairs are all major strikes against a property. Yes, technically you can fix them up (and probably use them as leverage in your negotiations), but these items complicate the transaction terribly.
They’ll also slow down the process and increase the likelihood your property will sit vacant for several weeks or months before it’s ready to rent. Avoid these holdups by purchasing a property that’s in good condition.
- Price
As the age-old wisdom goes, you want the least expensive house in the nicest possible neighborhood. By the same token, you should never (under any circumstances) purchase the most expensive house in the area.
- Rental Rate
As you look at real estate prices in your neighborhood of choice, you should compare property values with market rental rates. This will give you an idea of whether there’s meat on the bone. In other words, it’ll help you get a rough estimate of cash flow.
Every market is different, but many real estate investors use the “2 Percent Rule” to analyze whether a property has potential. This basically holds that monthly rent should be at least two percent of the purchase price in order to cash flow well.
Thus, on a $100,000 property, you want to be sure you can get at least $2,000 per month out of it. (That’s not a requirement, but it’s a good measurement to keep in your back pocket.)
- Potential
Finally, study the property’s long-term potential. Are there ways for you to improve it dramatically so the property will produce greater cash flow down the road?
For example, is there space to add on? Could the structure eventually be turned into a duplex? Is there a vacant lot next door that you could purchase as part of the deal?
Always Do Your Due Diligence
You might feel as if you’re taking things too far at times, but thorough due diligence is necessary at every step. Never take something for granted or make assumptions.
Firsthand insights and concrete data will help you make smart decisions that have a positive impact on your finances in the years to come.