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How to Identify good rental investments
June 29, 2016
Owning property is tough, and the field is scattered with land mines that can annihilate your returns. We will look at some things you should be considering when shopping around for an income property.
Before contacting a real estate agent to help complete the purchase of a rental property, you should start searching on your own. Contacting an agent before you are ready to buy, can bring unnecessary stress and could pressure you to buy before you are ready. One of the most important things to remember is to take a neutral approach to all the neighborhoods and properties that are within your investing range.
Your investing range will be limited, depending on whether you plan to actively manage your property or hire a property management company. If you anticipate that you will be managing the property yourself, you should get a property close to where you live. If you expect to get a property management company to look after it for you, proximity to the property is less of an issue.
Neighborhood is a big factor in property investment. This will influence the type of tenants as well as how often you need to fill vacancies. If you buy homes in a college town, your tenants will mainly be made up of college students. This means that you will probably need to fill vacancies on a regular basis (when students leave for summer break).
Property Taxes are not the same for every home. That being said, you as an investor are planning to make money by collecting rent, so you want to know how much you will be losing to taxes. Sometimes a high property tax mean that it is an excellent place for long term tenants, but this is not always the case. The town’s assessment office will have all the tax information on file, or you could always talk to the homeowners within the community.
Your future tenants may have, or want to have children, so having a home near a school may be ideal. Once you have found a home near a school, check the schools report card, as this can affect the value. If the school has a good reputation, prices will reflect the property’s value well. We know you are mostly concerned about monthly cash flow, so the overall value doesn’t come into play until you sell the property.
Locations with increasing employment opportunities tend to attract more people – this turns into more tenants. To find out if an area is growing, go to the U.S. Department of Labor Statistics. If you notice an announcement of a major company moving to the area, you know that workers will flock to the area. This may cause house prices to react depending on the company moving in.
Check your potential neighborhood for current parks, malls, gyms, movie theaters, public transportation, and other perks that will attract renters. Cities have loads of promotional literature that will give you an idea of where the best blend of public amenities and private property can be found.
No one wants to live near a hot spot for criminal activity. Go to the local sheriff's website for accurate crime statistics for various neighborhoods, rather than asking the homeowner who is hoping to sell the house to you. What to look for are vandalism rates, serious crime, petty crime, and recent activity (growth or decline). Ask about the frequency of police presence in the neighborhood.
If there is an unusually high number of listings for a particular neighborhood, this is wither a sign of a seasonal cycle, or a neighborhood that has gone bad. Make sure you figure out which before you buy you property. High vacancy rate force landlords to lower rents in order quickly snap up tenants; low vacancy rates allow landlords to raise rental rates.
The rental income will be your bread and butter of the rental property, so it is important to know the average rent in the area. If charging the average rent is not going to be enough to cover the mortgage payment, taxes, and other expenses, you will have to keep looking. Remember that what you can afford now, could mean bankruptcy later; it all depends on the market.