9 Ways to Spot a Profitable Rental Property
Real estate investing is an effective way to generate passive income and build wealth. While they certainly come with challenges, rental properties can be great investments for pros and novices alike. But how do you know if a rental property will make a profit? To make a wise real estate purchase, you need to know what to look for. Here are 9 ways to spot a profitable rental property.
1. Prioritize In-Demand Areas
As with any type of real estate, investment properties are all about location. Purchasing a rental property in an in-demand location allows you to charge competitive rental prices. You’ll also boost your chances of making a profit on an eventual sale.
So, what should you look for when considering locations? It’s worth researching other rental properties in the area and keeping an eye out for rental signs. If an area has a low vacancy rate, it’s likely worth considering. However, you’ll also need to balance the prestige of the neighborhood with your initial budget.
2. Remember the 1% Rule
The 1% rule is one of the formulas that real estate investors use to assess a potential property. This rule states that the monthly rent you charge should be at least 1% of the total cost of the property. So if you pay $125,000 for the property, rent should be at least $1,250 per month (ideally more).
In hot real estate markets, investors might find that asking prices are too high to satisfy the 1% rule and still charge reasonable rent. Of course, there are many other factors involved. But if the property isn’t lining up with the 1% rule, you might struggle to make a profit on it.
3. Keep Property Taxes in Mind
Property taxes are an unavoidable expense. Be that as it may, you’ll need to make sure you can afford the taxes in the area where you’re buying. This is especially important if you own more than one rental property.
Your municipality will have tax information available for you to review. Be aware of any local legislation that could change the property taxes as well. You don’t want any surprises once you close on the sale.
4. Estimate Maintenance Needs
Most investment properties will require some sort of initial repairs. However, it’s important to anticipate future maintenance needs, too. If the roof is showing signs of wear, it will likely require replacement in a few years. Old plumbing might be more apt to leak. As a landlord, you’ll be responsible for these fixes.
The location may also inform maintenance needs. If you live in an area prone to natural disasters, consider whether the property will hold up. You want to make sure that your tenants are safe and the damage won’t drain your funds.
Again, the property will likely require some fixes. You just need to determine when the fixes won’t keep you from making a profit and when it’s best to keep looking.
5. Research the Job Market
A healthy job market means your tenants have a better chance of being employed. It also means that more people will be moving to the area for jobs. When searching for a profitable rental property, you want to see an upward employment trend.
There are a few ways to assess the job market when considering an investment property. First, find out the unemployment rate in the city. Note whether it’s changed over the past few years. You should also look for any news pertaining to employment, such as a corporation opening an office in the area.
When your tenants are gainfully employed and people are moving to the neighborhood for jobs, you reduce the risk of unexpected vacancies.
6. Check Crime Rates
Rental properties in low-crime areas will be in higher demand and sustain a steady stream of tenants. It’s therefore worth checking the crime rate of an area before exploring potential investments. Contact the local police for up-to-date crime records.
You don’t need to buy in a neighborhood with zero crime — few such places exist! Yet a spate of recent burglaries and incidents of vandalism are a sign that you should buy elsewhere.
The police may also be able to tell you whether there’s been an upward or downward trend in crime. This statistic is worth asking about, since you should know what the future could hold for your tenants. You wouldn’t want a tenant breaking their lease because of rising criminal activity.
7. Consider Local Schools
Proximity to a quality school district is often a factor to consider. If you’re planning to rent to young professionals or college students, this might not matter. However, if you’re looking to buy a single family home as a rental unit, inquire into the schools.
Remember, the home might not be a rental property forever. It’s likely that a young couple or family might purchase the house after you. Proximity to an in-demand school district will boost your ROI, leading to future profit.
8. Make a List of Amenities
There are plenty of perks that will matter to your immediate tenants and future buyers. When visiting potential investment properties, make lists of the amenities that will attract both. These could be sidewalks, parks, community gardens, and nearby restaurants and shops. If you’re buying in a city, proximity to public transportation will likely be significant.
Keep your ideal tenant, and future buyer, in mind when checking off amenities. These conveniences will keep your property in high demand for both rentals and sales.
9. Talk to the Neighbors
If a property is on your short list of potential investments, take time to talk to the neighbors. They will give you anecdotal insight into the ins and outs of the neighborhood.
If they’re willing to chat, don’t hesitate to ask plenty of questions. Do people move in and out of the neighborhood often? What’s the average age of the residents? What might locals be seeking in a rental?
The answers to these questions will determine whether your goals for the property line up with the market. Compare their answers to the data you’ve gathered about crime rates and home sales. All of this information will help you decide whether to make the investment.
Whether you’re a real estate maven or investment newbie, there are plenty of reasons to invest in rental properties. But when purchasing your first property, you need to make sure you can turn a profit on it. Doing your research and trusting your instincts will provide clarity. Just be sure to be patient. Finding a truly profitable investment property takes time.