What Kind of Property Makes the Best Rental?

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(The following is an excerpt from the new book from BiggerPockets, The Book on Rental Property Investing. If you are looking to buy more rental properties this year, pick up a copy today!)

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.

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Bedrooms

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.

Related: The Investor’s Guide to Rental Property Features (& How They’ll Affect Your Profits)

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.

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Age

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.

Garage

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.

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Utilities

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.

Related: How to Find a Tenant in Any Market: A Comprehensive Guide

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!

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Lawn

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.

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Parking

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.

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Location

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.

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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!

Photo Credits:MAZZALIARMADI.IT, cindy47452, kangster,the_irreverent_creative,[email protected]@nce, NicestAlan; cc

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like... seriously... a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of "The Book on Investing in Real Estate with No (and Low) Money Down", and "The Book on Rental Property Investing" which you should probably read if you want to do more deals.

21 Comments

  1. Stephen S.

    I agree with most of that Brandon. Although I do favor 2BR units and also avoid 4BR units. One reason is that in the past I have found a surprising tendency for tenants to sublet space if there are four or five bedrooms.

    “Oh; this is my Uncle John – he just stopped by to visit with us for the weekend.”

    “This is my brother / sister / cousin (etc.) – they just stopped by.”

    The lease prohibits it but unless I want to become a prowling detective it’s hard to argue over it. A 2BR unit typically cuts down on that problem.

    Probably a 3BR does have the best appreciation and resale value I think but in weighing out the pros and cons over the years I have found that 2BR units suit me and my style the best.

    Interesting that you mention utilities – for a year or so I have been toying with the idea of trying an all-inclusive rental: the tenant would just pay one fixed number for everything.

    BTW: the tenant-leaves-the-windows-open problem is somewhat easy to fix. My kids were endlessly guilty of it. So for my own house I had my alarm guy install a relay for me. I used it to switch off all heating and cooling if any door or window was open.

    stephen
    ————–

  2. Dawn Anastasi

    Great post, but I’m going to disagree with you on the 2 bedroom house. I have a few 2 bedroom houses and I love them. They appeal to older couples whose children are already grown. Since they are older, they don’t want to move and tend to stay put. They don’t throw wild parties and take care of the house because they may have owned in the past.

  3. David Krulac

    Brandon,
    Good comprehensive article!

    BEDROOMS:
    I’ve had everything from 1 bedrooms to 5 bedrooms. I like 3 or 4 bedrooms best but have had good results for all sizes. I’ve had tenants in 1 bedroom places stay for 17, 21 and 30 years, so transients has not been a problem. The 21 year tenant wouldn’t move despite my encouragement until I found them another place in the same town/same school district. A fellow investor friend of mine has exclusively 1 bedroom units in his portfolio, including 2 story 1 bedroom townhouses, because his target tenant is either a single person or a couple. He has very few children and is looking for tenants with jobs who aren’t home 24/7. He feels that the result is less wear and tear on the property because of less people, few kids and people who are away 8-10 hours every day.

    AGE:
    I’ve had properties as old as 1840, pre indoor plumbing, pre electric, pre cars, and pre building codes. In my Bigger Pockets Podcast #82, I talk about doing a IRS Section 1031 tax free exchange out of buildings built in 1890 to buildings built in 1994 and 1996, trading up a century in time. The acquired properties had central air, fireplaces and attached garages, that the 1890 buildings did not.

    Recently bought a 1910 building that had extensive remodeling, but the rehabber/flipper didn’t add an insulation. Out of sight out of mind! There was zero insulation in the attic. I added R-50 insulation and it only cost about $1,000. I’ve added R-50 to many of the buildings that I own to reduce heat/air conditioning costs even though I’m not paying the heat.

    GARAGES:
    21% of my rental properties have garages. Personally I like garages, can’t have too many garages. At a former personal residence I had 6 garages, it was like heaven. Tenants don’t always share my love of garages. I wrote in my book (Chapter 6) about an early purchase of a SF detached house with a detached garage. The prospective tenants who viewed the house weren’t interested in the garage; so I rented the garage separately to people with show cars. They stayed for 17 years and I only saw them the day they rented the place and never again for the next 17 years. I’ve always had strong demand for garages rented separately but not so much from tenants. Either rental tenants are used to parking their cars outside, or they use the garage for storage and still keep the cars outside despite having a garage. In that case alternate storage like a shed or basement could suffice.

    UTILITIES:
    I agree tenants should pay as many utilities as possible. I have some condos where heat is included in the condo fee, other than those all house and apartment tenants pay for their own heat and electricity. In the apartments I do pay for water, sewer and trash. In the houses where the sewer & trash is municipal billed and lienable against the property, I pay the sewer and trash. Its just easier, and I don’t have to forward the bill and wonder if its paid. and obviously that’s included and considered in the establishment of the rent payment.

    LAWN:
    I have several properties with 2 acre lots. Some prospects don’t like the responsibility of cutting the lawn, and that probably does cause pause with some tenants, but I still have not had a problem renting those properties. I’ve had 20, 15, 7, and 4 year tenants at those properties and just singed 2 and 3 year lease for some of those properties this summer. Several of the tenants use a lawn service and pay about $80 or so a week for that service. We’ve never had a tenant at those type properties not cut the lawn. I do have a lower priced property out in the country where the tenant has not cut the lawn in 2 years and the grass is waist and chest high. But the rural local government doesn’t have a grass regulation and there are other people who don’t cut their grass, my tenants are not the only ones. I think they should make hay with the tall grass.

    PARKING:
    I won’t buy a property without off street parking, though I do have a few old purchases like that. Everybody or almost everybody has a car or multiple cars and they need places to park. For the properties without garages there are carports and/or driveways. I do have a very few of tenants who don’t have cars, but that is usually not the case. Both tenants and prospective buyers want places to park their cars.

    LOCATION:
    I want properties in good school districts, low crime areas, close to amenities and in residential areas. If a property meets ALL of those criteria, it would be a property that I’m interested in, otherwise not interested.

  4. Rachel Trimble

    Great post! I have a 2-1 condo in a highly desirable area of Austin (Tarrytown) and am ready to make an offer on a 3-2 SFR in Del Valle. In Austin, the 2% rule is equivalent to a unicorn. My condo is .5% and this SFR in Del Valle will be about .9%. The rental property calculator gave me the confidence I needed to pull the trigger, and this article further backed up the quality of this investment. Thanks BP!!

  5. Richard Flanders

    First, Location, there must be employment that should be there way into the future. Second, 3 bedrooms and a garage for all the reasons stated. I try for 2 baths, in case there is an issue with one, I don’t have to put them into a hotel while they can’t take showers. A great house in a bad location is no bargain.

  6. My property is rent controlled and I can only raise the rent 3% annually. So long term tenants is not really a good thing.

    Does anyone have experience with having a starting lease set at 2 or 3 yrs?

    • Katie Rogers

      It is unfortunate you think a long-term tenant is not a good thing. On the other hand, when I was a tenant, I found the generally speaking, bad landlords want to trap tenants by having leases. Good landlords start and stay month-to-month. Good landlords also show their appreciation for good tenants by focusing on providing, a nice HOME for the tenants at a fair, even under-market rate, and raise rents sparingly. Focus on money and you will get some money. Interestingly focus on the time-tested Golden Rule and you will end up with more money.

  7. Dan White

    Brandon,

    Thanks again for stimulating a great discussion.

    The kind of property that makes the best rental is the property that will retain the longest term tenants and ultimately provide capital appreciation. I have always looked for properties with an exit strategy in mind although i am a buy and hold investor, what features do people want when they settle down and buy a home…3/4 bedrooms, garage, decent yard, decent neighborhood (but affordable) easy commuting location.
    In my market (Greater Tacoma Area) my favorite rentals are 1970’s SFH, they are easy and low cost to maintain, very simple design, typically 7 windows to a 3 bedroom home, no fancy painted moldings, modern wiring, plumbing, simple roofs etc. The older you get the more expensive and time consuming the maintenance. Definitely stay post WWII, I have learned the hard way and have several very old homes, need I mention lath & plaster walls, nob & tube wiring, endless small windows, roofs too steep to walk on, non-existent insulation, odd bathrooms as they were added on when indoor plumbing was invented, and of course all the painted moldings, ancient sewer lines made of clay pipe… (replaced 4 in the last 2 years)…
    In my inventory of 40 homes, my average tenancy is about 8 years. Most of my 4 bedroom homes have small square footage with the 4th bedroom more of a den or play room. My SFH inventory consists of 6-2’s, 22-3’s, 10-4’4, 1-5, 1-6, the six bedroom now serves as a group home plan to be there indefinitely. Unless you use the large homes as group homes expect to collect a lot of people. I also have a group of duplexes and a tri-plex, consisting of 6- 3 bed units and 9 two’s, The average tenancy in the multi units is about 18 months, with the 3 bedroom units having the longest occupancy.
    Over time I find that my average occupancy rate is increasing as I collect tenants that have no plans to ever leave. I try to provide excellent service and provide upgrades that save them money, double pane vinyl windows, all Light bulbs are CFL, enhanced insulation where ever possible and of course responsive maintenance when needed. Low turnover equals BIGGER POCKETS

  8. This was a very good article! When I first learned from some Rich Dad mentors, they kept pushing the four-plexes as the ideal investment. However, I did the “wrong” path and chose instead a 4/3 single family home in a rather nice neighborhood in Vegas. After that, it was a 3/2 single family home.
    Maybe I did not cash flow as well as the Rich Dad proforma numbers, but it just felt more secure putting in one family at a time rather than looking for several tenants.
    Over the years, the ones that bought multi-plexes in Vegas did poorly – crime, immigration raids, constant repairs and tenant turnover.
    All of your points are spot on. I only wish that we could purchase a rather new 3/2 with garage in a good neighborhood in Hawaii without the crazy prices here.

    • Mary Stewart

      I am looking forward to doing rentals again but am currently a Realtor working a lot of rentals per month for military and medical relocations. When I place a military family in a home , there priorities are as follows: Tile, laminate, or wood floors in the main wear areas. Rarely will view a property with carpet. Secondly, they all seem to want that separation of the master bedroom from the other bedroom Almost all want a three bedroom units, rarely rent less then three bedrooms. Lastly, must have stainless kitchens or nicer kitchens. Since they are moving frequently, they feel a little guilty and really want the wife to have a great kitchen. A garage is a high priority for most because they have a lot of toys and just stuff to store.
      This is the typical profile of 90% of my customers, but #1 is always “No Carpet ” in high traffic areas.

  9. Rick C.

    Hey Brandon – Excellent post! One thing I would add is that if cash flow is a priority, then a 3 or 4 bedroom will generally have a higher cash on cash return than a 1 or 2 bedroom. Although the 3/4 may have higher expenses than the 1/2, in my experience the increased rent has more than offset those expenses.

  10. Kevin Williams on

    I’m with the 2 bedroom ,1-2 baths with garage around 1000 sf. I have 4 and wish I had bought more . Single older tenant with small pet . They all say they want it to be the last place they ever rent. Quiet tenants and report all problems. I would build some but costs don’t work for small units.

  11. Jacob Vincent

    Argh!! Brandon, I clicked on this expecting you to have spoon-fed me a silver-bullet tip!

    I came here expecting to read: buy this specific floor plan, in this specific zip code, at this specific price, and just sit back and watch the money roll in.

    😀

  12. So condos are out of the picture? I think they’re good too. Though the value of condos doesn’t really rise as fast as a house does, but the upkeep and maintenance of the condo is not for your shoulders to bear. And some people prefer condos because they don’t want to maintain a lawn. And condos that are in the city or are in the parts of the city that are the busiest will have a very high value and people will look for them more as a lot of people would prefer a place the could call home close to their work makign it more convenient for them. The problem with parking is that you have a reserved space for only 1 car. And when it comes to bed rooms, most condos have 2 or 1 bedroom and the targets of condominiums are those who are working within the city, so 1 bedroom or 2 bedrooms would be enough for them, even if they hook up with their workmate. They’d still sleep in one bed though. 😀

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