Locating a good rental property is more complicated than you might think. Lots of inexperienced investors assume that they can snap up any old property, and transform it into a cash churning machine. Actually, there are several vital factors that affect how profitable a house will be. Just making a few small upgrades, advertising for tenants in your local newspaper, and waiting for people to beat down your door will not cut it. If the demographics or market are poor, any enhancements you make will count for little. Then again, if you locate a good property in a good neighborhood, you will enjoy monthly profits and a long term income for however long you own the house. The following four factors should play a big part in determining which rental properties you purchase.
The Local Neighborhood
Conventional wisdom is that the market has to be solid, however this is too broad a statement. Begin by assessing the neighborhood the property is located in. You have to adopt the mindset of a tenant, when weighing up whether to invest in a rental property. You might manage to negotiate a low price for the property, however if the tenants are turned off from the area, you might have to accept a lower rental price than you would prefer. As a general rule, it is advisable to pay a higher price for a house in a desirable location, instead of the reverse. This way, you will be able to achieve optimum cash flow, and you can attract a better class of tenants – who will probably remain in the house for a longer period. This cuts down on the number of vacancies you have to fill, which means that you save money by limiting your turnover of tenants. If your gut instinct tells you that the neighborhood is unappealing, there’s a good chance that your prospective tenants will feel the same way.
When assessing demographics in the local area, there are plenty of things to take into account. It is common knowledge that the number of people renting today is at an all time high. If the property you are considering is in an area with weak demographics, your tenants are likely to look further afield. Begin by considering the town’s economic strength as a whole. The most effective way of doing this is to look at the jobs market. Rates of unemployment nationwide have reduced, however it is vital to evaluate this figure in a local context. If a major source of jobs has recently left the town, it is safe to assume that demand from renters will decline. Another accurate way of gauging demand is to look at the local schools. Buyers and renters prefer to live in areas that provide good quality education for their kids. If the local schools are substandard, or if there is talk of an impending school closure, you might wish to move on. The local crime figures are the last main demographic you should be aware of. Everyone prefers to live somewhere where they feel secure. If the local newspapers are filled with stories about rising crime levels, this might deter many potential tenants. If you encounter any problems locating demographics data, visit the local council website or get in touch with your realtor.
Other Costs and Tax
Cash flow calculations are more complex than just deducting your mortgage payments from the rent you receive. In addition to your mortgage payments, you should factor in your home insurance and taxes. Although these are usually the same amounts each year, they do change from time to time. In neighborhoods with a growing number of foreclosures, you might be hit with an unexpected property tax charge. Thousand dollar increases are fairly common, if the town’s economics are weak. Also, you should consider any payments that are not related to the mortgage. If the house is in an area affected by cold weather, you should include snow and ice removal in your costings. Over the winter, this might add hundreds of dollars to your expenses. This is also true with regards to properties situated in mainly warm areas. For these properties, you should take into account exterior updates and garden maintenance. Regardless of where the property is situated, it is vital to know every monthly cost you have to pay, and which of these costs your tenants can pay. These calculations will determine your all important cash flow.
Evaluating Your Competitors
While you are weighing up whether to purchase a rental property, it is wise to keep track of your competitors. In the same way that if you advertised your house for sale, tenants will be comparing your property with other properties available for rent in the neighborhood. Do not assume that a minor update to your home will increase your rental price by twenty percent, compared to similar properties. There are many websites specializing in rental properties, where you can research your competitors. Note the length of time that different properties have been advertised for, and how many listings there are. If there are many pages of properties for a certain area, this can indicate that demand is low, so you might have a difficult time attracting tenants. In contrast, if the supply is restricted, this can indicate that rentals are being snapped up left, right and center. Get in touch with the local property owners and ask them to give you their thoughts about the market. Most of the time, they will be prepared to tell you what they know.
With real estate investing, the key thing is to assess a property on its’ potential, rather than its’ appearance. Much of the time, installing an additional half bathroom or knocking a wall down can significantly increase the value. By focusing on what value you can add, you will transform the cash flow potential of a property. Buying real estate to rent out is not just a question of making a purchase, then waiting for tenants to arrive. Take heed of the four tips above, and you will greatly improve your chances of finding the ideal rental home.