The Dos and Don’ts of Choosing a Profitable Rental Property
Investing in real estate can absolutely be a benefit to your financial portfolio, but it is not a commitment to make without careful research and the right knowledge. If you’re considering entering the rental game, you will want to educate yourself on the various pros and cons involved in owning a this type of investment property.
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Becoming a successful landlord who sees a return on their investment takes some savviness, patience, and a great deal of effort. With the right information, investors can avoid critical mistakes when purchasing rental properties that might end up costing big money in the long run. Here are a few tips on what to look for when searching for a potential rental property that will give you an advantage while browsing the market.
How to Choose a Profitable Rental Property
DO: Avoid fixer-uppers.
Properties with minimal required repairs may cost more than the traditional fixer-upper, but you will save money by avoiding expensive or unexpected repairs and updates. A little TLC or a few minor repairs here and there aren’t a big deal (and are usually expected), but large-scale home improvements are going to add up quickly.
It’s enticing to think about purchasing a home at a bargain price and flipping it into a rental property, but—for your first rental property—it may be a better idea to look for a home that is priced under the average market price and only needs minor repairs.
DON’T: Bite off more than you can chew.
Today’s popular home improvement reality shows can make the renovation process look glamorous and fun. However, unless you are a skilled contractor or know someone who can execute renovations professionally but cheaply, your out of pocket costs are going to add up and gradually deplete the value of your return.
Beware of signs that the fixer-upper you’re considering might be a mistake, such as a poor floor plan or issues with the foundation. These are not going to be quick fixes and will cost you valuable time and money.
DO: Look for a property in the right neighborhood.
Purchasing a property in an area where the rental market is already thriving will increase your chances of high profitability on your investment. Look for neighborhoods that cater to specific renter demographics—college or university students, young professionals, seasonal workforces, and those with travel-heavy occupations are consistently in the market for rental options.
Consider the proximity of your potential rental property to important amenities and features that renters will look for: grocery stores, public transportation, schools, hospitals, shops and restaurants, etc. Renters are likely going to be looking for a safe location with reliable access to their interests and hobbies.
It is also important to do your research on the properties surrounding the property that you’re interested in. Get to know the neighbors and learn about the pros and cons of the neighborhood from them. Are many properties nearby also rentals? This could potentially cause too much competition when you start to look for tenants.
DON’T: Make a decision without considering location.
You can change or upgrade almost anything about a rental property, but the one thing you can’t change is its location. Even if you find the perfect house to invest in—it’s below the market price, has minimal issues, and boasts an ideal layout—you could still be left struggling to fill the property with tenants if it’s in an undesirable location. Consider the rental demographic you’ll be going after and what they’ll be seeking. Students will want to be close to their campus, young professionals will want to be close to their jobs, and families will want to be close to schools.
The location of your rental property will also be a big factor in profitability when it comes to your investment. Think about supply and demand and how it will affect your income. The ideal scenario is a location with a low supply of rental properties but a high demand for them. These factors, as well as your proximity to amenities, will play a role in determining how much you can charge for your monthly rent, and in turn, whether or not your rental income will be positive or negative.
DO: Investigate all of your concerns, even the minor ones.
Even a deterrent as simple as something cosmetic can often make or break your income potential. If the house is outdated, the landscaping is a mess, or the flooring desperately needs to be replaced, potential renters may be less likely to pay a rental price that will help you see a return on your investment. Look for a property with faults that can be easily updated or—even better—one with issues that you can fix on your own without needing to hire outside help. Worn out wallpaper can be taken down and repainted at little cost to you, outdated kitchen cabinets can be easily refreshed, and hardware can be replaced cost-effectively for a quick update.
If the property you’re looking at needs minor repairs that require outside help, like a water heater replacement or chimney sweep, call in the professionals and you’ll have the issue fixed in no time. However, don’t overlook “minor” issues that can turn into bigger, more expensive issues down the road. Always be cautious when it comes to things like water leaks, roofing concerns, or electrical issues.
DON’T: Overlook the big issues.
Pay close attention to the issues that can lead to major property damage and a major investment of time and money. Check the gutters to make sure they’ve been maintained properly and don’t have any signs of cracks or severe dents that could cause you to be a victim of flooding. Survey the foundation and base of the property for cracks or holes that may lead to flooding or uninvited pests.
If you do notice any cracks in the gutters or foundation, visit the property during and after rainfall to see if any flooding has occurred. This will help you gauge if there may be water damage within the infrastructure that isn’t readily visible. If so, you should definitely investigate further.
The Bottom Line
Purchasing a rental property is not a decision to be taken lightly. While there are many factors you need to keep in mind when searching for an investment property, don’t let this deter you from making the investment. Arm yourself with the right knowledge and take your time in selecting the perfect property for your situation.
Owning a rental property is often compared to running a small business, and it is entirely possible to be wildly successful in your entrepreneurial endeavor.
Have I left any key considerations out? Do you have any questions for me about rental property investing?
Let’s discuss in the comments below.