What Kind of Property Makes the Best Rental?
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In 2006, NASA admitted they had accidentally taped over the original recording of the first lunar landing.
In 1962, Decca Records had a choice to sign one of two bands. They chose Brian Poole and the Tremeloes. The band they rejected? The Beatles.
In 1788 the Austrian army accidentally attacked itself and lost 10,000 men.
Clearly, mistakes happen. The same will be true for your real estate business, though hopefully to a lesser extent than the examples mentioned above.
However, one mistake that can be deadly to your real estate business is this: choosing the wrong property.
Making the mistake of picking the wrong property is a lot like picking the wrong spouse. It can be incredibly stressful, expensive to get rid of and detrimental to your well being!
But how do you know what the right property is? After all, there are a lot of properties out there.
- What should you buy?
- What should you avoid?
- Are four bedrooms better or worse than two bedrooms?
- What about garages?
- What about neighbors?
- Color? Age? Size?
These are important questions you should be asking if you want to buy the right deal and have the most success as a landlord, so let's dig in on several things that I look for when shopping for a rental property.
Keep in mind, all of this depends heavily on the trends in your location. Furthermore, the following list is not a bunch of rules you must follow, but rather pieces of wisdom that I’ve picked up on and have served me well. So let’s get to it.
It's hard to get long-term tenants in a one or two bedroom house. Tenants who are single tend to choose a one-bedroom, but quickly hook up with that cute guy/girl from work and now need a larger place. They move into a two-bedroom and soon start having kids and now need more space again. Therefore, in my experience, three or four bedroom houses tend to make the best rentals because they attract long-term tenants, cutting down on your vacancy expenses. Furthermore, three-bedroom houses are also generally the best kind of property to sell, which can be great when it comes time for that.
If you are looking for a multifamily property, two bedroom apartments are usually acceptable and incredibly common. Single bedroom and studio apartments are also common, but tend to attract a more transient tenant, so expect more turnover in that style.
Also, understand that having more bedrooms is not always better. Once you get into the five bedroom homes or higher, you’ll find the only tenants willing to rent them are families with a lot of kids. Now, I like kids as much as the next person, and I would never discriminate against them (that’s illegal!), but the truth is: Having a lot of kids is hard on a property. Broken windows, stained carpet, etc. Keeping a house to three bedrooms (and maybe four) is the best way to keep the kid count low, legally.
The older the property is that you buy, the more expensive it’s going to be to fix. I invest in a lot of older homes because they offer the best price in my market, but I definitely pay dearly for my choices.
Projects that seem to be fairly simple have a tendency to get out of hand quickly, as existing but unknown problems are discovered. You have to deal with the work others far less skilled have done over the years and live with the consequences of past shoddy work.
Older homes are also generally less energy efficient than newer homes, which can cause the utility bills to be much higher. You might not think that matters much if the tenant is going to pay for their own heating or cooling, but trust me, tenants know. If your property costs an extra $100 to heat or cool, your tenants will do the math, and you may have a more difficult time keeping a property rented long-term.
Again, I’m not telling you that you should not invest in older homes. Just understand that the newer the property is, generally the fewer issues you will need to deal with.
When investing in single family houses, it can be difficult to find a stable, long-term tenant in a house without a garage. Tenants tend to accumulate a lot of stuff, and they need a place to store it. Plus, in areas that get a fair amount of snow or rain, tenants like the luxury of being able to park in a garage.
I’ve generally found that the homes I own that have garages stay rented far longer than those homes that do not.
Some properties, especially older ones, have all the utilities paid by the owner, which is NOT ideal.
I only buy these kinds of properties if the numbers truly make sense — because having so little control over this major expense will cause a major headache. When tenants don’t need to pay for their own heat, they tend to leave windows open in the winter or their air conditioner running 24-7 in the summer. If they don’t need to pay for water, they’ll never let you know about the constant drip in their bathroom costing you hundreds of dollars a year.
When looking for single family homes, look for ones where all utilities (including water, sewer, garbage, electricity and heat) can be paid directly by the tenant. When shopping for multifamily, at least look for ones where heat and electricity can be paid by the tenant, and if you can find properties that can be converted to a “master metered” system to allow tenants to pay for their own water, you’ve potentially struck gold!
Properties with large lawns, gardens and other outside features will never be taken care of by tenants the way that you or I would take care of them. Although there are exceptions to every rule, I look for properties that have smaller yards to keep the yard work for the tenant at a minimum. That said, recreational space IS very important in attracting a stable long-term tenant, so make sure there is somewhere the tenant (and their kids) can go to run around and have fun.
Stable tenants need a place to park their vehicles. Off street parking (a driveway, carport, or garage) is something nearly all great tenants prefer, so look for properties with this feature. And generally two parking spots are better than one, three are better than two, and so on.
When shopping for a property, keep an eye out on what’s nearby. A tenant is just like you: They want to eat out occasionally, they want to take a jog in a park, they need to pick up milk from the grocery store. They want to send their kids to a good school and have a minimal commute to their job.
They don’t want to be mugged, shot, stolen from or embarrassed. So buy in locations that tenants want to live in, and you’ll find a more stable rental.
These are just a few of the property characteristics I look for when buying a property. You don’t need to get each and every one perfect to get a great rental property, but these factors are important to consider when shopping for a property.
What about you? Any characteristics you would add to the list? Anything you would change?
Share your thoughts below!