There are many benefits to investing in a residential rental property. It’s passive income and offers you tax benefits, which are just two great reasons. However, not all investment properties end up being profitable. Before you take on this long-term real estate investment, you need to understand what to look for. You also need to understand what renters are looking for. Research is key, as well as working with a Realtor who has strong connections within the community you are looking to invest in.
Things To Consider First
If this is your first time buying an investment property, there are some steps to take before you get started. You will need to evaluate your time commitment and financial stability. Will you have the time to maintain and renovate the property? Will you have the down payment and closing costs as well as several months' worth of mortgage payment until the home is ready for renters to take on the payment? Also, keep in mind that rental properties can become vacant for some time in between renters. If you come to rely on renters to pay the mortgage costs, you might find yourself in a bind. You'll know you are ready to buy an investment property if you are financially stable and have the time to maintain it (or money to hire someone else to do it).
If you have done the research and know you are ready, then congratulations on this exciting path to becoming a real estate investor! While there are many different factors and features to look for when buying an investment property, we will focus on the top five that are most important. If you have these five covered, you are more likely to attract long-term renters, increasing your return on investment (ROI) and saving more money in the long run.
#1 - Location
Start by researching the best locations for the type of investment property you want to purchase. An appealing location will ensure you get a great ROI. This will determine the amount of rent you can charge, the quality of the renters, and the frequency of vacancy. For example, single family homes are the best type of property to start out with as they will attract families who may stay in the home longer. Avoid college towns if you don’t want college students renting seasonally and too much turnover rate.
You’ll want to look for neighborhoods that are attractive with a lot of amenities that the type of renter you want will appreciate. Great schools, entertainment, and shopping are essential if you want to attract families. The safety of the neighborhood will also factor in. Is there a nearby hospital and police station? What is the crime rate?
#2 - Low Maintenance
Unless you are a retired person with the time and expertise to do most of the home maintenance on your rental property, this is one to watch out for. Many first-time investors try to save money by buying a property that needs a lot of work. If you love HGTV’s Flip or Flop, you may think you can do a lot of the work yourself to save money. However, even if you save on hiring contractors, you will still need money for the supplies. And how long will it take you to do all of the work yourself? You may miss out on several months of rent if you take a lot of time renovating the home.
Even if you buy a house that is move-in ready, how much maintenance is anticipated in the long run? You will need to decide if you will do most of the maintenance or if you will hire a property manager. Some investors will allow reduced rent to the renter if they do some of the maintenance themselves, which may benefit you as well.
#3 - Look At The Numbers
Create a financial strategy to make sure that you are covered for more than just the cost of the mortgage. You will need to consider the property taxes. Check with the municipality’s assessment office to find out the tax information. Find out how often the property taxes increase, if possible.
Don’t forget to factor in the homeowner’s insurance. Is there a Homeowners Association (HOA) fee for the neighborhood? Make sure all recurring costs are figured into your financial strategy. Expenses may vary over time, but you want to make sure you allow for wiggle room for unexpected costs.
#4 - Job Market
If you want to attract financially stable renters, research the job market in the area. Locations with growing employment opportunities are ideal. The Dallas-Fort Worth (DFW) area is the number one location on the U.S. labor market.
#5 - Consider Future Development
Try to find out if there are developments or plans already zoned for new construction in the area. New developments could potentially hurt the price of surrounding properties. New housing could be serious competition with your rental property.
Don’t Focus Too Much On The Risks
There is a temptation to give up on your dream of investing in real estate because of the level of risk involved. No investment is ever a guarantee, and it’s important not to ignore the risks. However, if you make an informed plan and strategy, you will be set up for success. An investment property can be one of the best financial investments you make. Consult with a Realtor today to get started on the path to your investment!
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