There are many things to consider when it comes to investing in rental property. Below are the top three considerations you’ll want to take into account when buying rental property.
Consideration 1: Location
I can’t stress enough about how important the location of your rental property is. Often times new investors don’t put enough emphasis on where their property is located. You will want to purchase your rental home in an area that is conducive for rentals. Watch out for HOA’s and rental restrictions on any property you are looking to buy. Fees from a homeowners association can eat into your profits quickly and often times there are restrictions on how and when you can rent your property. Also consider the neighborhood at both ends of the spectrum.
A high end luxury home can often bring a great rental price but many times these homes have less demand as a rental and can sit vacant for many months, taking away any chance for a profit, especially if you are making mortgage payments every month. At the other end of the spectrum, a house in a “war zone” that appears to have a higher ROI can often have high turnover which is very expensive. Finding the balance in location will help you maximize your rental income. You want an area that is affordable, expanding in growth and offers very little restrictions in leasing.
Consideration 2: Cost vs. Value
Many of us have heard this saying before. You can look at the price of a property and think it’s a great deal but sometimes when you look close there’s a reason the property is “cheap.” Low priced homes are often low priced for a reason. If it needs a major renovation you will need to add those costs to your bottom line and determine how long it will take you to recoup the cost of the repairs.
Touching again on location, many times homes in high crime areas, appear to be low priced, but in fact the actual cost is very high when you end up dealing with high turnover and possible tenant damage to the property. You can make changes to the building but it’s very difficult, if not impossible, to change the neighborhood. I have seen it time and again where people buy a rental property that has a low price tag but in the end, it costs them way more than they could ever actually make in rental income. So be sure to not make price the main consideration. In fact I recommend making it second or 3rd to location and growth potential.
Consideration 3: Growth Potential
This consideration is very important when looking at rental properties. What is meant by growth potential could be called, equity potential, or highest and best use. Basically can the property become more than it is as it sits now? That’s the question you need to ask yourself, or your agent who’s helping you purchase your rental homes. Some examples of highest and best use are, taking a property that has strictly been a residential property and making it commercial. You’ll need to consult with the city or county to determine if zoning will allow for this. But if it is possible, you can generally get much higher rents for a commercial property than a residential.
Other considerations might be adding another living unit, building a new property if there’s extra space on your lot. Or maybe subdividing and selling a portion of your property. The simplest form of growth potential is simply finding a property that has lower than market rents and raising the rents to increase income!
Author: Peter Garian aka “Property Management Pete” is a Real Estate Broker and Property Manager with over 14 years experience working in Real Estate. He holds a brokers license in two states, Florida and Massachusetts.
Excellent point on HOAs. They can kill your rental. Always do your due diligence before buying a condo to rent out. Make sure they wo’nt exceeded their max allowable rentals if you convert another unit to a rental. Also watch for annual assessments in lieu of higher HOA fees.