It’s no secret that buying a rental property can be an excellent investment. If you ask a successful investor what’s in their portfolio, there’s a good chance that it’s at least partially comprised of real estate assets.
Many people are attracted to investing in real estate because of the opportunity to generate a steady stream of passive income for years to come and build generational wealth.
However, as with any investment, it’s important to do your research and consider all the factors before deciding to buy in. This blog post will explore the nine things you should consider when purchasing a rental property.
Financing
The most important thing to consider when buying any property is how you will finance it, especially with investment properties.
While first-time homebuyer programs can allow for a down payment as low as 3.5%, there are different requirements for investment loans. This is largely because of the higher risk potential associated with investment properties, particularly when compared to loan options for primary residences.
Neighborhood/Location
You have probably heard the adage that the secret to real estate success is “location, location, location.” This is equally true for an investment property.
Where a rental unit is located will impact the type of renters you’ll attract and can boost the property’s value. The ideal neighborhood for your residential rental property has a low vacancy rate and many attractive amenities, like accessible public transportation, for you to receive the most return for your investment.
You might instead look for it to be close to local attractions that would appeal to tourists if you’re planning to use it as a short-term rental, such as Airbnb.
On the flip side, some things to be mindful of about the location include the property tax rate and rental regulations. Both can limit your potential earnings. If your rental property is in a college town, you might see a lull in renters during the summer.
Job Market
As you can imagine, an area’s job market will affect the income potential of a rental property market.
A booming job market will attract more potential renters to an area. A great example of this is the effect that the announcement of Amazon HQ2 had on the Arlington County housing market in Virginia.
From the project’s announcement in 2018, the median house price increased by almost 20% in 2019 alone. While the DC area has benefited from continually increasing housing values, Arlington County’s growth has even outpaced neighboring North Virginia counties.
Crime
The crime rate of the area around your rental property might affect your maximum earnings in a few ways. Areas with higher crime could dampen the demand. If fewer people are interested in living in your rental property, you may not be able to charge as much for rent, or you might experience more extended vacancy periods.
This can also affect the property’s value and make it harder to sell. A study of English and Welsh house sales found that while a property’s criminal history doesn’t significantly affect its value, each instance of a violent crime on a specific street can lower the value of every property on that street by up to 2%.
A high crime rate can also drive up your expenses. Your insurance rates will likely be higher, and you may need additional coverage against theft and vandalism.
To make prospective tenants feel safer about renting your property, you can install extra security measures, like an alarm system and security cameras.
Rental Type
Something that you will have to consider is the type of rental that you are looking for. It will affect the location and features you look for in a property.
If you are looking for a short-term rental, like on listing sites such as Airbnb and VRBO, you should look for properties close to tourist destinations, like major cities or a beach getaway destination.
Conversely, you may be looking for a long-term rental where you would have a renter sign a lease for a certain amount of time. If you are considering this type of rental property, you will want to look at locations with high rental housing demand.
Property Condition
When evaluating potential rental properties, you should thoroughly inspect how ready it is to be rented.
In the ideal scenario, your rental property will be in perfect condition and furnished with brand-new working appliances. Only some properties will be in pristine condition, though.
You already know that investment properties require a larger downpayment, so you’ll definitely want to consider the costs of potential repairs or upgrades when creating your budget.
School Zones
The school zone that your rental property is in can significantly influence its earning potential.
If your rental property is in a top-tier school zone, you can probably charge a higher rent than a comparable property in a lesser zone.
School zones are a significant feature for potential renters with children, with many willing to pay more for access to the best schools.
Property Management
If your rental property is far from where you live, you might consider the cost of hiring a property management company, rather than managing it yourself.
A property management company will usually take a percentage of the rent in exchange for screening potential tenants, collecting rent, maintaining the property, and any other potential tenant issues.
If you do not have prior experience as a landlord, hiring a property management company can save you time and many headaches.
Natural Disasters
The last thing that anyone wants to happen to any property is for it to be damaged or destroyed by a natural disaster. Of course, this is why home insurance exists, for that worst-case scenario.
If your investment property is at an increased risk of being affected by a natural disaster, you will probably pay more for home insurance, which will cut into your profit potential. Home insurance can be especially concerning for properties in Florida or other coastal locations. Many insurance companies are not offering new coverage to avoid being responsible for the huge expenses that destructive storms can cause.
Whether you are an experienced or novice investor, real estate investment can be a complex and overwhelming process. Our team of expert loan officers is very skilled at real estate investment loan programs. Get started with a free consultation with one of them today!
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The included content is intended for informational purposes only and should not be relied upon as professional advice. Additional terms and conditions apply. Not all applicants will qualify. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. This is an advertisement. Prepared 05/04/2023.