If you're thinking about moving out of a home you own, why not consider renting…
There is a lot that goes into finding the right rental property. Many novice investors think they can turn any property in a cash flowing rental property. The reality is that there are a handful of important features that influence just how strong the property will be. It is not enough to make some minor improvements, stick a “for rent” sign in the front yard and wait for tenants to flock to the property. If the market is poor or the demographics are weak any improvements you make could be for naught. On the flip side, if you find the right property in the right area you can earn monthly cash flow and long term wealth for as long as you own the property. Here are four important qualities of any successful rental property.
- The Surrounding Area. Simply saying the market needs to be strong is not enough have success. Start by examining the immediate area surrounding the property. With rental properties you need to think like a tenant. You can get a great deal on the purchase price but if tenants don’t find the area appealing you may not be able to rent for as much as you think. It is always better to pay more for a property in a better location than the other way around. By doing this not only can you maximize cash flow but you will also find better tenants that tend to stay in the property longer. This reduces vacancies which allows you to not have to deal with constant tenant turnover. If you don’t find the immediate area appealing the odds are your tenants won’t either.
- Local Demographics. There is plenty to consider when evaluating local demographics. It is no secret that there are more renters today than ever before. If your property is in a town with sagging demographics they will surely look elsewhere. Start by looking at the overall strength of the town’s economy. The best way to do this is by looking at the job market. National unemployment rates have improved but it is important to look at this number on the local level. If a large job source has just left the area you can bet that renter demand will eventually be reduced. Another good indicator of demand is the local school system. Renters and buyers want to live in towns that offer the best schools for their children. If the school system is poor or there are rumors of a school closing you may want to look elsewhere. The final major demographic are the crime numbers in the area. Everyone wants to live in a property where they feel safe. If crime has been on the rise and in the news they may automatically eliminate the town. If you are having trouble finding information on demographics ask your real estate agent or go directly to the town hall website.
- Taxes, Misc. Expenses. There is more to calculating cash flow than simply subtracting your mortgage payment by the rent received. Inside of your mortgage payment you need to factor in the property taxes and insurance. While these are typically consistent annually they can change at any time. In areas with increased foreclosures you can have an unexpected hike in the property tax payment. It is not uncommon to see an increase of several thousand dollars if the town’s financials are poor. You also need to look at any non-mortgage payments as well. If the property is in a market impacted by winter weather, you need to add snow removal to your budget. This could easily add a hundred dollars or more in the winter months. The same is the case with properties located in predominately sunny areas. With these properties you need to factor in lawn maintenance and exterior upgrades. Wherever the property is located it is critical that you know all the monthly expenses you must endure and which you can pass along to your tenants. These numbers hold the key to your cash flow.
- Competition. As you evaluate a rental property purchase you need to keep an eye on the competition. Just as if you were selling tenants will compare your rental with every other rental property in the area. You cannot expect minimal improvements to give you a 20% bump compared to the rest of the market. There are a handful of rental websites where you can look at the competition. Look at how long the properties have been listed for and the volume of listings. If the area has pages full of supply it can be an indicator that demand is poor and you may have a tough time finding tenants. If there is limited supply it can be a sign that rentals are flying off the market. Reach out to the landlords listed and ask if they can give you any insight on the market. In most cases, they will be willing to share whatever they know.
It is important not to evaluate a prospective property on how it looks now but rather the potential. Often times knocking down a wall or adding an extra half bathroom can greatly enhance the value. If you look at where you can add value it will change the cash flow of the property. A rental property purchase is more than buying and waiting for tenants. Look at these four areas to help you find the perfect rental property.
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