How to Identify Profitable Rental Properties for Investment
There are many factors to consider when looking to buy a rental investment property. As with any investment, there are inherent risks and a certain level of uncertainty involved — but a fair amount of upfront research and due diligence can help to mitigate that risk. Potential owners should be certain that their investment will provide the highest possible return.
Here is a breakdown of some of the most important factors to consider when researching an investment in a rental property.
Start with the Obvious: Location
Location is everything in real estate and choosing the right location for making an investment is the key ingredient for a successful strategy. Here are two main factors to consider when determining a target location for investing:
- Comparable rents in the area – Investors will need to know the prevailing rental rates in the area in order to determine the rental conversion rate (cost to acquire compared to rent payments).
- The type of tenants – Landlords will want tenants that have a stable income and a willingness to sign longer-term leases. Most rental property owners target blue-collar, middle-class income earners as a way to limit turnover and vacancy rates.
Targeting the neighborhood with the right mix of both of these factors is vital for rental income success. Potential owners should also note that both of these scenarios can be dramatically impacted by just a short geographical distance. Traveling just a block or two can make a difference in both rental income and potential tenants.
Go to School
Other than location, few factors impact real estate value more than the school system. Owners need to consider the quality of schools in the investment area. Studies have proven that school quality can account for as much as 50% of the final decision when choosing a property to rent. Landlords should spend as much time researching the schools as the potential tenants.
The saying that crime does not pay is literal when it comes to rental income. A high crime area can be as much as 5 times more difficult to rent and result in a tenant turnover rate 12 times greater than areas with better crime rates. Statistics on crime rates are easily accessible through real estate websites, local news sites, TV stations or even the Police departments.
Most properties have been staged and prepped for sale and will likely appear attractive on the surface. However, structural issues, water damage, electrical and plumbing problems oftentimes are only uncovered by a certified professional performing a home inspection. State and local authorities often require sellers obtain a certified home inspection prior to selling a home but it is always a good idea to obtain an additional sign-off from a trusted third party as a precaution. Unplanned repair and maintenance costs can very quickly eat into any rental income profits.
In order to obtain a reliable return on investment and a steady stream of rental income, all of the factors listed above need to be considered very carefully. As with most investment decisions, the up-front due diligence will determine the long-term success of the property.