With interest rates near historic lows and rental costs still soaring, it makes sense to invest in some real estate, but just like buying a primary home, investing in a rental property requires a lot of consideration, research, and decision-making to guarantee a positive return of investment. Though these tasks may seem daunting to a first-time real estate investor, they are essential to making sure your property will generate the revenue you desire.
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A successful investor remains unbiased when searching for a property and stays within the means of their investment range. Here are several of the many items you should consider when you are shopping for your first rental property.
The quality of the neighborhood in which you choose to buy will influence multiple factors of your investment's profitability, vacancy rates, and re-sale value. For example, if you purchase a property in a college or university town, you may need to account for the higher possibility of vacancy rates in the summer months and more tenant turnover.
Schools are a huge factor on homebuyers' and renters' want lists. 91 percent of homebuyers cited school boundaries as a deciding factor in their home search, according to a Realtor.com® survey.
Even though your renters may or may not have school age children, school quality affects your home value and will affect your re-sale value when you decide to sell your rental property. Click here for ways to determine whether your potential property is located in a quality school district.
Job growth is often a good indicator of the need for rental property. Employment opportunity typically means a greater need for local housing and rental opportunities. To find out how a particular area rates in employment and job growth, visit the U.S. Bureau of Labor Statistics.
Future Housing Development
The amount of new builds, both residential and commercial, is also a good indication of economic health in the area. Visit the local municipal planning department for information on new developments that have been zoned in the area.
Keep in mind that while these new developments are great for economic growth, certain builds like new condos or apartments could provide competition for your renters.
Just like residential real estate, rental prices work on a supply and demand model. Higher vacancy rates typically force landlords to lower rent to fill up their properties, while low vacancy rates create higher demand, allowing for increased rental prices. Rental vacancies hit their lowest percentage in 30 years last June, forcing national rent increases to climb even further.
Proximity to local amenities is an important factor to the success of rental property, regardless of your target market. Check into the distance of malls, parks, gyms, pharmacies, grocery stores, etc. from your prospective property. The convenience of location will be a great selling point for your potential renters.
Rent & Covering Costs
This factor is a no-brainer. You will need to determine whether the amount you are able to ask in rent will be enough to cover costs of the property, including the mortgage, taxes, insurance, maintenance, etc. Do some research of other rental properties in the area to see what the going rate is for similar properties.
Apart from covering the mortgage payment and maintenance costs, there are several other items you’ll need to consider:
- Will your renter pay for all or some of the utilities?
- Is the property part of a homeowners association?
- How will you find tenants? Will you need to find a realty company to do showings and advertise or will you do it yourself?
- What if you happen to have a vacancy for a few months?
If you're interested in buying an investment home, download our free Investment Guide for more information and tips on purchasing a successful rental property.