Rental property investing will require prospective buyers to consider a number of factors, not the least of which are outlined below.
A good rental property is contingent on both tangible and intangible characteristics.
What makes a good rental property will differ from investor to investor, but there are six universal rental property signs to look at.
What are the most important factors to consider when looking for the perfect rental property investment?
Investing in rental property successfully, not unlike your standard flip, is contingent on several factors. In this case, the sum really is equal to all the parts, as everything needs to fall into place for a rental property investment to reward investors. Some rental property investors allow themselves to be frozen by “analysis paralysis” and never get deals done. At the very least, they end up paying a lot more than they need to. For one reason or another, “green” rental investors are confused by all of the numbers that come up in a deal. So what are the most important factors when picking rental properties that will actually be profitable? Perhaps even more importantly, how can you make sure investing in rental property is lucrative for your business? What makes a good rental property, and how can you make sure you see the signs?
What Makes A Good Rental Property?
There is no universal definition that exists to define a “good” rental property. Assigning such a subjective moniker to an asset is almost arbitrary, but that’s not to say there aren’t several signs to look for. While not the only signs of a good rental property, the following characteristics are almost universal in their inclusion:
Cash Flow & Growth Potential
Rental property investing
Don’t consider investing in a rental property if you aren’t going to put any thought into where it will be. It is said that location is the most important factor in acquiring a good real estate deal, which is absolutely true. However, the best time to get into a certain location can definitely change, as markets are constantly in flux. National real estate may represent the overall tone, but it’s all about locale. Picking the right cities, neighborhoods and even lots makes a difference. What is your timeline for holding the property? Will, you self-manage or have professional property management on hand to deliver superior returns and generate truly passive income?
Cash Flow & Growth Potential
Cash flow is one of the most important factors to consider when investing in a rental property. If there is no cash flow, why does it make a good income property investment? What guarantees are there of future income, or even finding a renter at all? How long will it take to get a property in “rentable” condition? At the very least, if the property doesn’t already have cash flowing, look into a professional property management company. A good third party management company is worth their weight in gold. Much of the rest, including location, may not matter much without cash flow. It is important to get a handle on future growth potential and where real estate values are headed. Where will they be when you plan to sell, or at crucial moments when you may want to tap equity for big-ticket items? Be conservative, but hope for the best.
Property condition is where most real estate investors sabotage themselves. New property investors all too frequently underestimate how property condition can impact their investments. Of course, some also allow themselves to be scared off investing in otherwise awesome property investments. For example; no matter how ugly the house, great value can often easily be found in cosmetic improvements, and even in some homes with foundation issues or that have termite damage. Will it take $5,000 and four days to get a property completed and rented, or $150,000 and six months? Will the property need to be torn down at a cost of tens of thousands of dollars and rebuilt?
Just as important is the ongoing property maintenance and costs. Depending on age, quality of building, and other factors, how much will need to be set aside for capital reserves each month and year? How does this compare to other investment property options? How will it impact the intensity of property management needs?
Perhaps even more important than the property itself is the management. Any opportunity is only as good as the execution. An ugly house in a deeply depressed area can yield amazing returns with good management. On the other hand, even the best home in the nicest neighborhood might deliver horrific results with poor management. Who can bring the expertise to manage your property for superior returns? It’s wise to have your property manager identified ahead of making an acquisition than scrambling after the fact.
Property value is important. Of particular importance, however, is the value of the property compared to what you are paying for it. Income investors clearly have different priorities to other types of investors. They might not need the bargain basement discounts of wholesalers. They need good income-producing properties that will have enough equity to liquidate on their timeline. Appreciation is good, and it may not make sense to buy brand new pre-construction, but cash flow rules and speculation on future value comes second. Also recognize how valuations are changing in many areas, and are being based on the income potential of a property.
What do area trends predict for the future performance of this property? What new developments are coming? What revitalization efforts are being made? How are the fundamentals likely to change? Is the population growing? What about jobs and wages? Who will live here in 20 years from now?