7 Questions to Ask Yourself about Property Rental Profitability
A rental property can be a great investment, providing a stable, sustainable way to receive monthly income and grow your wealth. However, it is important to invest wisely to get a return on your money.
Not all properties are made equal, and some are much better than others. The factors that can affect the financial success of a rental property are complex, requiring a thorough knowledge of the industry, the geographic area, and your own capabilities as an investor. If you are seeking to expand your portfolio, drive passive income, and successfully support your business ventures, adequate due diligence is extremely important. Here are eight questions you need to ask before moving forward with a rental property investment.
Is the Property Priced to Make Money?
Price matters in virtually all contexts, but it’s especially important in real estate. In certain areas, even a difference of a few thousand dollars can have a great impact on the profitability of a rental property.
When evaluating property, be sure to closely analyze a property’s ability to actually make money. Breaking even isn’t enough; to ensure you’re on solid financial footing with your rental property, it’s important that you can generate adequate revenue to cover both known and unforeseen expenses. Buy a property that’s too expensive and you risk listing rent at a rate that’s not going to be competitive in the market.
Is the Property in a Desirable Neighborhood?
A city is a vibrant, dynamic place, operating in many ways as its own organism. Everything, from location of amenities and restaurants to styles of architecture, can impact how and where area residents choose to live. As such, it’s silly to think that one neighborhood is just as good as another.
Before tossing tens or hundreds of thousands of dollars into an investment property, make research a priority. A simple drive-by to admire the gardens and home styles isn’t enough; you need to dig beneath the surface to get to the bottom of life in the communities you’re considering. Things like parks and local access to schools are more desirable and will rent for more.
Most police departments list area crime tables on their websites or, for smaller towns, on paper in their offices. Be sure to take a close look at the general crime rates as well as the crime breakdowns – shoplifting, for example, will be easier for renters to stomach than an uptick in robberies.
Does the Property Have Amenities in Close Proximity?
As they say, location, location, location. Where a property is located can make all the difference, especially in small areas with limited opportunities to offer. In addition to factors like crime rates and neighborhood breakdowns, you also need to look at things like nearby grocery stores, restaurants, and other retail outlets. After all, would you rather live a few miles from a grocery store, or around the corner? How about a few blocks from convenient highway access, or on the other side of town?
Walkability can also be a strong point of consideration for some renters, especially students, seniors, and young adults who may rely on mass transit. Shopping and dining within walking distance can be a big win, attracting a wide range of different demographics. This may seem like a less concrete metric, but websites like Walk Score can help you narrow things down.
Note that in some cities, walkability is less important. Some areas of the country are heavily car-dependent; in these regions, easy access to stores and restaurants on foot may not be quite as influential, but highway access and ease of parking may be more important. Be sure to note habits of local residents when evaluating these kinds of features.
How Are the Surrounding Schools?
A fun neighborhood in close proximity to amenities in a safe part of the city matters, but it isn’t the only qualifier that will count with your renters. For family-sized units, like larger apartments, condos, duplexes, and single-family homes, local schools will likely matter to renters too. Even couples without kids may factor school choice into the house hunt, choosing to plan for the future while scouting available properties.
Research the availability of the local elementary, middle, and high schools. A bad school district can significantly harm property values, making what initially seems like a good deal a much worse buy. Families will frequently choose to live in more expensive properties simply for the sake of schools, so ensure you’re making a good investment in an area that will appeal to plenty of renters. School report cards are available online on sites like SchoolGrades and GreatSchools, putting all of the information for a particular city at your fingertips.
In a city with few, if any, strong public schools? You’re not off the hook. Even though private schools offer a geographically wider net for enrollment, many families will still want to live close by.
What Other Costs Are Associated?
Amateur investors believe that once a property is paid for, costs stop accruing. Seasoned investors, on the other hand, know that this isn’t true at all. For many investors, the costs of owning a rental property keep on coming – sometimes at increasingly high rates.
When determining the true price of a property, be sure to factor in other expenses, like property tax, HOA fees, and even utilities. All of these things can vary greatly from one area to another. This is especially important in cities with specific taxes called Community Facilities Districts, or, more commonly Mello-Roos. These specially outlined areas are intended to collect additional public funding in excess of property tax, which can result in thousands of additional dollars per year.
Do I Have to Make Extensive Repairs to the Property?
As seasoned investors know, repairs and renovations often come with the territory of property purchases, especially for those planning to rent out a home. These can be as minimal as a new coat of paint or as major as a whole new layout. Before making an investment, you’ll need to determine exactly how much work is required. A seemingly-affordable property can quickly become anything but when substantial changes, like a new roof or septic system, come into play.
While in the consideration process, work with your inspector to come up with a reasonable estimate. Remember to be conservative; repairs can often cost more than you think they will. The more realistic you can be, the better. The kinds of changes you make can play a sizable role in the success of your rental, so don’t cut corners, either – instead, you’ll want a remodeling plan that gets you the most bang for your buck.
What Are Area Occupancy Rates?
You picture it in your mind: a charming apartment building, or maybe a desirable duplex in a great part of town. Your renovation plan is both superficial and functional, creating a modern and livable space that area renters will love. The price is fair, and you’ll be able to list units at a rate that is competitive with the market. What could go wrong?
In many cities, your concept is virtually problem-free, provided your management skills are up to par. If you live in an area with low occupancy rates, however, you may not get the results you expect. Low occupancy can leave even amazing opportunities left empty for a little too long, costing you thousands in lost rental revenue.
Before making a purchase, be sure to carefully survey the number of other rental units in your area, as well as average occupancy rates. If you choose to buy in one of these locations anyway – for example, if your hometown has typically low rental occupancy – be prepared to invest extra money and energy into ensuring your property stands out in the market.
Even the best laid plans can go awry when it comes to property investing, especially for properties purchased in haste, but with some appropriate research and the answers to critical questions, a rental property can be a great investment.
Scott Clift is a licensed real estate broker with Westpark Loans. He has been in the real estate industry since 1994. His team of seasoned professionals specialize in providing real estate loans for investors and other self-employed individuals. When you are ready to invest in real estate, call Westpark Loans to secure your financing at (844) 574 LOAN or by visiting westparkloans.com.