We get asked all of the time by first time investors and experienced investors about what makes up a profitable rental home. Here is a list of things to consider when buying a rental home or turning your current home into an investment property.
Key Points to Consider When Purchasing an Investment Home
- One of the most important parts of the home is the condition. Rental homes in perfect condition demand more rent and bring much better tenants than homes that need repairs. Even minor repairs to a property can turn away great tenants and lead to many maintenance issues in the future. Make sure you have had a thorough home inspection to maximize your investment.
- The quality of the neighborhood in which you buy will influence both the types of tenants you attract and future vacancies. For example, if you buy a property near a university, the chances are that your potential tenants will be mainly students. Also, you will face vacancies on a fairly regular basis, especially during summer when students tend to return home.
- Property taxes are not standard across the board. As an investor planning to make money from rent, you want to be cautious of how much you will be losing to taxes. High property taxes may not always be a bad thing if the neighborhood is an excellent place for long-term tenants, but the two do not necessarily go hand in hand. The town’s assessment office will have all the tax information on file, or you can talk to homeowners within the community.
- Your tenants may have or planning to have children. So, they will need a place near a decent school. When you have found a property near a school, you will want to check the quality of the school as this can affect the value of your investment. If the school has a poor reputation, prices will reflect your property’s value poorly. Although you will be concerned about the monthly cash flow, the overall value of your rental property comes into play when you eventually sell it.
- No one wants to live next door to a hot spot for criminal activity. Go to the police or the public library for accurate crime statistics for various neighborhoods, rather than asking the homeowner who is hoping to sell the house to you. Items to look for are vandalism rates, serious crimes, petty crimes, and recent activity (growth or slow down). You might also want to ask about the frequency of police presence in your neighborhood.
- Locations with growing employment opportunities tend to attract more people – meaning more tenants. To find out how particular area rates, go directly to the U.S. Bureau of Labor Statistics or your local library. If you notice an announcement for a new major company moving to the area, you can rest assured that workers will flock to the area. However, this may cause house prices to react negatively or positively depending on the corporation moving in. The fallback point here is that if you would like the new corporation in your backyard, your renters probably will too.
- Check the potential neighborhood for current or projected parks, malls, gyms, movie theaters, public transport hubs, and all the other perks that attract renters. Cities, and sometimes even particular areas of a city, have loads of promotional literature that will give you an idea of where the best blend of public amenities and private property can be found.
Building Permits and Future Development
- The municipal planning department will have information on all the new development incoming or has zoned into the area. If there are many new condos, business parks, or malls going up in your area, it is probably a good growth area. However, watch out for new developments that could hurt the price of surrounding properties by, for example, causing the loss of an activity-friendly green space. The additional condos and/or new housing could also provide competition for your renters, so be aware of that possibility.
The Number of Listings and Vacancies
- If there is an unusually high number of listings for one particular neighborhood, this can either signal a seasonal cycle or a neighborhood that has “gone bad.” Make sure you figure out which it is before you buy. Also, you must determine whether you can cover for any seasonal fluctuations in vacancies. Similar to listings, the vacancy rates will give you an idea of how successful you will be at attracting tenants. High vacancy rates force landlords to lower rents to snap up tenants. Low vacancy rates allow landlords to raise rental rates.
- Rental income will be the bread and butter of your rental property, so you need to know what the average rent in the area is. If charging the average rent is not going to be enough to cover your mortgage payment, taxes, and other expenses, then you have to keep looking. Be sure to research the area well enough to gauge where the area will be headed in the next five years. If you can afford the area now, but major improvements are in store and property taxes are expected to increase, then what could be affordable now may mean bankruptcy later. Whether you’re looking for a rental property in Charleston or elsewhere – this is a key step.
- Insurance is another expense that you will have to subtract from your returns. It is good to know just how much you will need to carry. If an area is prone to earthquakes or flooding, paying for the extra insurance can eat away your rental income.