In 2006, NASA admitted it 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. Which band did they reject? 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 above. But one mistake that can be fatal to your real estate business is choosing the wrong property. Picking the wrong property is a lot like picking the wrong spouse.
It can be incredibly stressful, expensive to get out 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? Neighbors? 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 examine several things 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 and have served me well.
It’s hard to get long-term tenants in a 1- or 2-bedroom house. Tenants who are single tend to choose a one-bedroom but quickly hook up with that cute guy/girl from work and then need a larger place. They move into a 2-bedroom and soon start having kids and again find they need more space.
Therefore, in my experience, 3- or 4-bedroom houses tend to make the best rentals because they attract long-term tenants, which cuts down your vacancy expenses. Furthermore, 3-bedroom houses are generally the best kind of property to sell, which can be great when that time comes. If you are looking for a multifamily property, 2-bedroom apartments are usually acceptable, and incredibly common. Single-bedroom and studio apartments are also common, but they 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 5-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, anyway!), but the truth is that having a lot of kids is hard on a property—broken windows, stained carpet, etc. Keeping a house to 3 bedrooms (maybe 4) is the best way to keep the kid count down legally.
The older the property you buy is, 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 previously unknown problems are discovered. You have to deal with the work that others who were 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 will 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 a property is, generally the fewer issues you will need to deal with.
When you are investing in single-family houses, you may have difficulty finding a stable, long-term tenant for 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 that do not.
Some properties, especially older ones, have all the utilities paid by the owner, which is not ideal. Buy these kind of properties only if the numbers truly make sense, because having so little control over this major expense will give you a major headache. When tenants don’t need to pay for their own heat, they tend to leave windows open in the winter or the 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 the bathroom, thereby costing you hundreds of dollars a year.
When looking for single-family homes, look for ones for which 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/or their kids) can 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 for what’s nearby. A tenant is just like you: they want to eat out occasionally, take a jog in a park, pick up milk from the grocery store. Buy in locations where tenants want to live, 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.
Anything you’d add to this list?
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.