Which Rental Properties Should You Buy?
The US rental property market is heating up. Demographic, economic recovery, and stimulus spending could add up to big demand for houses, duplexes, apartments, apartment blocks, and condo buildings.
Rental properties still hold special appreciation, tax, and income advantages. Even in bad times, starting a rental property business has been good, but 2022 may see much bigger demand for rentals, particularly single detached house rentals.
More Americans are renting and the homeownership rate is declining. Housing supply is not expected to keep pace with demand and infrastructure/regulation in cities won’t allow for expansion. The prices make it impossible for individual buyers, but for landlords with investment funds, the opportunity to buy and grow their business is happening.
Now the big question is which type of properties to buy. Each type comes with different prices, financing and maintenance challenges and income potential. Of course, if you’re using next generation property management software, you can manage like a pro.
Construction trends and resale property availability is unique to each state so you’ll need to investigate where the best properties and rent yields are. Where to buy? Trends and rental housing stock change frequently, so keeping up to date is important. Fortunebuilders.com suggests these cities offer the yield potential:
- Boise, ID
- Orlando, FL
- Huntsville, AL
- Dallas, TX
- Austin, TX
- Raleigh-Durham, NC
- Jacksonville, FL
- Tampa Bay, FL
- Houston, TX
- Cleveland, OH
- Cincinnati, OH
- Atlanta, GA
Location is definitely a big part of the investment decision, but perhaps more influential is your choice of property.
Better Properties plus Better Efficiency
The formula today is simple. Find and assess properties with rising potential and automate management to widen your profit margin. Yes, the actual number crunching you do is very complex, but we’ve listed some property asset features below that might be more influential for your long term ROI.
By searching for and finding better types of properties you can raise your property profit margin and have an asset that renters desire continuously. These better properties are easier to rent, easier and cheaper to manage, and allow you to charge premium rents.
Rental properties arriving on the selling block might be perennial poor performers in terms of revenue and profit margins and earnings. However, some of them might be a good match for you.
Efficient Management is Another Key Factor
If you’ve optimized your property management processes, you could handle these properties and the tenants profitably where current traditional owners couldn’t. There’s big opportunity in efficient property management.
Big rental property firms with hundreds of properties are able to turnover properties to cull out the bad ones and bring in better choices. Superior efficiency is how they’re able to grow.
Efficiency and volume and is how they become so successful. These companies are looking for better properties in new growing neighborhoods, often outside the major metros.
Looking Deeper than Cap Rates
Are cap rates the main criteria you weigh when buying new rental properties? Is the future rent price potential, low cost management, and long term equity gains perhaps more important right now? Is your ability to counter falling rent prices with features, amenities, incentives more important?
“One of the most important metrics an investor looks at when analyzing the acquisition of a piece of real estate is the CAP rate. The CAP rate is the property’s net operating income (NOI) divided by its hypothetical purchase price. It’s a straightforward way to figure out how many times “earnings” a property is being offered for.
Buying at higher cap rates means more initial cash flow and a lower sales price-to-earnings ratio, it certainly does not tell the whole story. And that’s an important part of capitalization rates. High cap rates don’t always mean good cap rates.” — from First National Realty Partners.
What Else to Assess?
Property investors also examine demographic trends, economic trends, finance trends, along with cost trends that could render their current properties unprofitable down the road. We want to know the reality and future of the property.
Right now, today, which 3 property criteria do you believe tell you all you need to know?
With financing costs at an all time low, rents falling, and with migration and business location changes, it’s a time when some rental properties with a good future might become available. And it’s a time when hanging onto certain properties could be damaging to business health.
Best Features of Rental Property?
The best properties are likely those possess that right mix of features that make them very compelling to renters. But that can vary from city to city and by neighborhood. Here’s a few you might include on your checklist:
- great, suburban or rural neighborhood where properties are being well maintained
- a low neighborhood vacancy rate
- has low property taxes
- nearness to common business district and restaurants
- 2 or 3+ bedroom units with 2 or 3 bathrooms
- simple landscaping easy to maintain
- roof in good condition
- flooring is in good condition preferably durable new flooring
- energy efficient with at least double pane windows in good shape
- major renos already done
- improvements and maintenance easy to do
- houses with an extra office space
- appliances included and furnace in working condition
- low rise apartments, townhouses, and single detached
- newer builds
- open floor plans
- a yard with natural foliage
- low density city that is growing
- properties in opportunity zones
- located near to schools
- family friendly, low crime region
- great shopping and recreational amenities nearby
- close to beaches and parks
- future developments planned in the region
- good economy and rising job numbers
- renter earnings in the region are not forecasted to fall
- rising rent prices
- lower property values
- low cost for property insurance
- not in a flood zone, next to a highway, or in Tornado alley
There are so many criteria, it’s hard to list them all. What the list suggests is that the big picture matters and avoiding rental properties with big downside risks and problems might be the smart play right now.
Hopefully, you can prioritize and group the main positives and top negatives to make a really good decision. If you’re buying out of state in the hot markets such as Texas, Utah, Colorado, Tennessee, and even Florida, such assessments are important.
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