There is a lot that goes into what makes a rental property a good investment or not. In fact, most properties don’t actually make good investments. But what exactly determines if a property will make a good rental property?
Typically, the primary factors are the numbers and the location. The numbers matter more than anything, but location will determine whether or not the projected numbers will hold up. Someone can advertise positive returns on a property all day, but the property itself needs to perform in order to actually see those numbers.
For detailed information on what kinds of things can cause the advertised returns of a rental property to not hold up, check out “The 4 Main Risks of Owning Rental Properties (& How to Mitigate Them!).”
But assuming an investor knows how to analyze the basic numbers and market fundamentals required to determine the potential quality of a rental property, there is still one thing that most investors forget to investigate!
Huh? What in the world does that mean?
This refers to whether you actually rent the property out. Well, you can probably rent it out, but will you have to dramatically decrease the rent or take on subpar tenants just to do it?
Let’s backtrack a minute and talk about how a rental property succeeds as an investment.
I believe there are two factors that are absolutely crucial for a rental property to continue to cash flow:
- The numbers
- The tenants
The market itself plays a role in this too, but numbers and tenants are the most direct impactors in my opinion. If either of those two things are lacking, you lose cash flow. Why?
Well, the numbers are obvious. If the income on the property doesn’t exceed the expenses on the property, you lose money. So if the rental income is below or decreases below your expenses, you lose.
If the numbers pencil out fine, you’ll have to use the eraser of that pencil to change the number you use for expenses if you get bad tenants. In my experience of owning quite a lot of rental properties, the costliest expenses so far have been directly due to bad tenants.
So, the projected numbers need to shake out, and you need to be able to land quality tenants. Those are the first things you should be exploring as a rental property investor. This kind of thing involves running numbers and analyzing the market and the neighborhood you are buying in because where you buy will in large part determine the quality of potential tenants your property might attract.
Once you get all of that analyzed, and assuming things are looking good, now you’re back to needing to do one last check—rentability.
Did I mention this is the one thing people tend to not even realize they need to confirm? Let me say the word again:
I say it again so you don’t forget about it—and you don’t forget to ask about it.
I’ve written about one of my personal rental properties in this exact context before. Probably the nicest property I bought with the intention of having it as a rental property has ended up, over the years, to be the absolute hardest to rent out. When I have been able to rent it out, it’s never been for as much as was initially advertised.
The detailed story of the (lack of) rentability with this property can be read here: “Is there Such Thing as Buying Too Nice of a Rental Property? (Hint: The Answer is Yes.)”
Since that article was written, I ended up not selling the house (the cash offer I mentioned fell out), and I did end up getting it rented. However, get this: The only tenant I could find for it was a Section 8 tenant. Not only did I have to go Section 8 on the property, but the most I was able to get in rental income from it was $300/month less than what the property was originally bringing in when I bought it.
So, my nicest and biggest rental property, in the nicest and safest neighborhood of them all, has had more rental decreases and vacancies than any of my other properties. This is even in comparison to a smaller property I bought a year prior on a sketchy street where the inspector was approached by prostitutes in the driveway when he went to do my property inspection. That property has hardly ever been vacant, has only seen increases in rent, and has never needed to go Section 8.
So, what is the difference in those two properties?
The difference is the rentability of each property.
5 Questions to Ask When Determining Rentability
Questions related to rentability would include:
- How big is the prospective tenant pool for this property?
- How long are vacancy periods running for this type of property in this neighborhood?
- What is the general quality of the tenant pool? Is the property likely to attract quality tenants?
- How likely am I to be able to charge the level of rent I’m expecting to get?
- Am I in a good position to find long-term tenants or is it more of a transient tenant type of area?
If you are shopping for a rental property and you’ve run the numbers and the market and neighborhood look good, then these are the rentability questions you need to be asking. They aren’t intensive questions, and they are certainly not questions you need to spend a ton of time on, but they could help you avoid unexpected rentability problems later like I experienced on my too-nice-of-a-rental property.
The best person, in my opinion, to ask would be to a local property manager who services that area. Even if you aren’t planning to use a property manager on the property and you are planning to landlord it yourself, it couldn’t hurt to use their expertise of rentals in the area to get these questions answered.
A real estate agent may also be able to answer these questions, especially the one who is trying to sell you the property, but typically real estate agents aren’t constantly dealing specifically with rental properties day in and day out for years at a time. Rentals are usually very secondary for agents—unless they work not only as an agent but also as a property manager on a regular and consistent basis.
Why You Should Enlist the Help of a Property Manager
Property managers are truly in the grit of rental properties in a certain area. They are likely to have such intimate knowledge of the rentals in the areas they cover that they can speak to specific neighborhoods, streets, and individual properties probably fairly easily.
It isn’t usually kosher to call an agent or property manager up and ask them for an assessment of something without offering to pay them for their time. Few people in real estate work off set salaries, so their time should be respected and compensated.
A common document that real estate folks often conjure up is a comparative market analysis (CMA). This is more often done to analyze sales comps around the area when thinking of buying or selling a property, but you can also have a CMA done specifically for rents. If you want to know how much a particular property is likely to garner rental income, an agent or manager can run the rental comps in the area and make a best guess based off of those on what a particular property may be able to realistically get.
This particular document will best service the question of how likely am I to be able to charge the level of rent I’m expecting to get?
As the agent or manager who runs this document looks for the comps, they may be able to get a little bit of a feel for rental property demand while they are in there. But as you may have figured out, numbers don’t always tell the whole story. I truly think the best knowledge you can get about the rentability of a property will come from outside of that CMA. Yes, the CMA may give you a good indication of a realistic rent for the property, but more of what you need probably needs to come straight from the horse’s mouth, i.e. the property manager.
A property manager is likely going to have a general numbers feel for you, even outside of a CMA. If they don’t have a number in mind off the top of their head, maybe because they haven’t rented a property in that specific neighborhood recently, they can probably look up some listings and give you a good estimate—not requiring something as formal as a CMA.
In addition to a number for rent, a property manager may be able to shed some perspective on the area in which you are looking. For instance, the property manager who said that he could have told me that the area I bought the nice property in wasn’t great for tenants—wish I had met him before I bought that property! I could’ve saved myself a heck of a lot of expense on bad tenants and vacancies.
Related: The Ultimate Analysis: Cash on Cash Return vs. Overall Return
Now, I want to clarify a major point before I go much further. As anyone dealing with rentals and property managers knows, property managers aren’t always the cream of the crop for worth or quality. As humans, they may be great, but as property managers, oftentimes they aren’t. So, I wouldn’t be shocked if you call one or two and they are clueless on the information you are trying to glean. In those cases, just try to find out as much as you can from who you can. Maybe you ask a combo of your agent and a local property manager or two. If a manager doesn’t know the answer to your questions, if he’s willing to ask around and see what he can dig up, that is commendable too. Keep calling around and just see what you can do.
How to Present Your Case to a Property Manager
My suggestion is to call a local property manager and present your case something like this:
You: “Hi there, my name is _____. I am an investor and looking to possibly purchase 123 Easy Street to rent it out. I am trying to get an assessment on the property and/or that neighborhood in order to get a feel for the rentability, as well as to confirm anticipated rents. I’d be happy to pay you for your time if you’re willing to help me out.”
PM: “Sure, what kind of information are you looking for?”
You: “Well two main things: realistic rental amount I could expect and general thoughts on the area itself for renters. Is there a high demand for rentals in this area? What is the general quality of the tenant pool? How are vacancy times running currently? For the comps, I’m happy to pay for a CMA if that’s easiest, but something less formal is perfectly fine as well.”
PM: “I can probably look into those things for you.”
You: “Great! Thanks so much. I absolutely want to compensate you for your time, so let me know what would work best.”
If you were a property manager, would that kind of presentation be enticing? It’s nice, objective, and offers compensation. If I were a property manager, I’d be happy to work with that person! If I were too busy, I may not, but otherwise, I’d be happy to grab a little extra income for gathering that information for the investor.
It could very well turn out that the property manager may know enough off the top of his or her head to be able to give you information fairly quickly, and they may be able to do it without needing or requiring compensation. But let them tell you there’s no charge, instead of you just taking the information and running. Always offer compensation, if not just for to be fair, but so as to not burn bridges as well. Real estate is a smaller industry than you think, and people talk.
There are variables all over the place that determine how well a property rents out. Some of it resides in the stars and can’t be determined. But if you can get the best feel that you can for the rental demand in a certain area, you’re on a good path to success.
Experienced investors—what are factors you’ve run into that you couldn’t have guessed would mess with the rentability of your rental property?
Leave a comment below!