A Special Report from The Pujals Team, Coldwell Banker Brokers of the Valley
Have you ever considered owning a rental property? Owning one or more properties that you rent to tenants is a great way to diversify your investment portfolio. Not only can you bring in a steady stream of monthly income, but you can also have an asset that historically appreciates very well.
Of course, the key to reaping the rewards of investing in the real estate rental market is to choose properties that have the highest chance of being profitable. While no one can predict the future or know for certain which properties will be most successful, there are some key features you can be aware of.
Following are the main things smart investors consider when buying a rental property.
1. Analyze the rental property.
Whether you’re purchasing a one-bedroom condo or a three-bedroom home, you want the rental property to be as close to move-in ready as possible. Sure, most properties will need paint and some minor repairs; however, you don’t want to have to invest a lot of money in expensive renovations just to get started, such as completely gutting and rebuilding a kitchen. If the home needs major renovations to be up to par with the neighborhood, that will quickly eat into your potential profits.
In terms of analysis, also determine if the rental property is typical for the area. In other words, if you’re looking at a three-bedroom home that is approximately 1500 square feet, is that comparable to the surrounding homes? Being the oddball home that’s significantly larger or smaller than the neighboring homes can make it more difficult to rent.
If you’re looking to buy a house rather than a condo, make sure the home has simple and easy lawn care. While it’s normal to expect renters to mow the grass at the property they’re renting, you can’t really expect all renters to want to maintain huge flower beds, sculpt hedges, or rake the leaves from 10 or more mature trees in the fall. If the home you want to purchase does require extensive ongoing yard maintenance, you may need to consider hiring your own gardener and factoring that into the rental price. Is the profit potential still there?
Finally, be sure to check the property taxes. While higher taxes may indicate a more stable neighborhood with the potential for long-term tenants, if the taxes are too high you might not get enough in rental income to cover mortgage, insurance, and taxes.
2. Analyze the neighborhood.
The neighborhood can affect the type or tenant you attract and occupancy rates. For example, is the home near a college or university? If so, then chances are you’re going to attract students and have vacancy during the summer months.
If your target demographic is to rent the home to families or corporate professionals, look for homes that have good neighborhood amenities. Some things that are typically important to people are being close to parks and shopping, and having easy highway access for commuting to work.
Look into schools and crime rates of the neighborhood too. If the rental property is in a family-oriented neighborhood, but the schools are far away or not the best, that can affect who you are able to rent to. Crime rates are equally important. Check with the local police department for information on crime statistics. Most municipalities have this information on their website. Simply enter the zip code of the neighborhood and you can see the local crime statistics.
Be sure to check the local and/or neighborhood laws too, especially if there is a Home Owners Association (HOA) involved. Be aware that some municipalities or HOAs attempt to discourage turning homes into rentals by imposing exorbitant permit fees and/or various bureaucratic red tape. You need to know of any specific rules that apply to rentals before you purchase the property.
3. Analyze the current (and potential future) rental market.
For any business endeavor, cash flow is king. Before you purchase the property, do some research into the current rental market in that area. What do rents go for in the area you’re considering buying in? Is the home you’re looking to purchase able to be profitable at that rental range?
When you determine your rental rate, remember that it needs to cover the costs for your mortgage on the rental property, taxes, insurance, HOA fees (if applicable), and money to set aside into a “renovation and repair fund.” You also want to turn some sort of profit. It may be small at first, but it should have the potential to grow as rent rates in your area increase.
Look at the current rental numbers in the area too. Are there a lot of rentals currently sitting vacant? If so, you may want to reconsider the location. Also look at future development plans for the nearby areas. Are they planning to build a lot of new homes or apartment complexes? If so, this can definitely impact your future rental ability and profit potential.
Finally, is the area as a whole prone to natural disasters, such as floods, fires, earthquakes, etc. This is certainly not a reason to forgo the property, but you should be aware as this can impact how much you need to set aside for renovations and repairs.
You Can Be Successful with Rental Properties
Every neighborhood has properties that would make wonderful rentals. You simply have to do your due diligence to find them. Since this is a business endeavor, be sure to make decisions based on logic and numbers rather than emotions and feelings. Consulting with other professionals, such as your real estate agents, attorney, and accountant can help keep you in the right mindset and ensure you make the best financial decision. When you choose your rental properties wisely by doing the needed analysis, you can reap the rewards of long-term, steady rental income.
Let us help you find the perfect investment property. When you’re ready to begin the home buying process, contact us 707.249.0518 or firstname.lastname@example.org.