Which Rental Income Property Should you Buy?
Residential income property investing is a hot topic today, and some smart investors are making lucrative returns.
90% of millionaires earn their fortune via real estate
However, would you know which houses, apartments, or multi-family buildings have the best income and cash flow potential? Do you know what to avoid and what could ruin you financially?
Before you consider hiring a real estate agent or investment advisor, it’s good to take account of what you want and need out of it. Before you contact a property management company, consider how much time, skill and resources you have at your disposal.
The quality of the property and it’s revenue potential along with finding the best tenants is really important to sustained success whether you have one property or one hundred.
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There’s a lot to consider before committing to a purchase so let’s take a big picture look at the top factors in your buying decision.
“The wise young person or wage earner of today invest their money in real estate” — Andrew Carnegie
Top 12 Considerations Before Buying the Best Rental Income Properties
The City and State – Yes, as in the Best Cities to Buy Rental Property post, some cities have far better potential for sustained rental income and capital appreciation. The economy in California for instance is strong, expected to stay strong, and where career opportunities are best. In smaller towns across America, the local economy is usually uncertain and speculative.
Review the local economy and whether it is rated optimistic for the next 10 years. Take a look at the California housing outlook , San Francisco housing market, and the South Florida rental market and Texas market now.
The Neighborhood – Demographics and Income. Renters like to live as close as possible to where they work, and that’s moreso as traffic congestion and long commutes grow. How far is the house or apartment from business or industrial areas where most work? What is the average income, education level, and family size in the neighborhood? Check online for reports about construction and other projects planned or proposed for that neighborhood. Is traffic heavy, is it noisy, and are there parks nearby?
Property Taxes – Some regions have no property tax and others such as California have property taxes pegged to the original purchase price. High growth areas likely mean fast rising property taxes and other expenses.
Schools, Transit & Medical Services – Some families wouldn’t consider a community with no schools, hospitals and other key services available. Check the neighborhood walkability score too.
Crime and Safety – It’s difficult for tenants to feel good and want to stay in your rental if they fear injury, vandalism, robbery, and being threatened. High crime areas have high turnover and defaults. Vacancies will be higher so the risk is high no matter how good a landlord you are.
Lifestyle – Properties in beautiful neighborhoods near parks, recreational areas, forests, and not far from quaint town areas where you find shops, gyms, grocery stores, and Starbucks are attractive to renters. With gasoline so expensive, more people are looking to urban areas where they can bicycle or walk. If they can walk to work, that’s even better.
Local Employment – Some areas of cities have high unemployment and low wages and the types of jobs available might be minimum wage retail jobs. This will put severe constraints on what you can charge for rent to make a profit.
Vacancy Rates Locally – high vacancy rates will make it a challenge, however currently this isn’t a problem for most North American, or Australian cities. Low vacancy rates give you more certainty that you’ll get your monthly rental payments regularly.
Residential Home, Condo and Apartment Prices – The rent price you can charge is vital to this investment making sense. You can find the average rent price via Realtor.com, Apartments.com, and other rental property listing sites.
Check that the state or city you might buy a rental property doesn’t have or plan to have rent price controls. Nevada doesn’t have rent controls, but some jurisictions in California and NY do.
The Price of the Property and your Mortgage Payments – Find out how much property you can afford and then dial it back a bit. The fees, interest rates, miscellaneous charges, commissions, HOA fees, maintenance costs, and building code requirements will take a good sized chunk out of your budget. It’s not all about the mortgage payments.
The Type and Condition of the Property – a 1 bedroom apartment downtown has a much different situation than a 4 bedroom house in the burbs. House repairs, upgrades, and maintenance is often much more expensive and sporadic than an apartment condo which has more predictable costs.
You can check most investment properties out yourself and you’ll have a gut feeling about whether they’re a good fixer upper opportunity. A home inspector will be able to help you check out an older house which does have the biggest risk. But even a brand new or pre-construction condo has risks. Can you build in the features that renters want?
Calculate Income and Expenses on a Spreadsheet
It’s wise to map out the expected and unexpected costs on a spreadsheet (or free property management software) so you can calculate the total cost and make yourself aware of when you’ll need funds. Yes, houses are in big demand and you can charge a premium rental price, but can you afford to replace the roof?
And if you’re buying multiple properties, the issues of financing, repairs, maintenance and tenant management increase significantly. And that’s when you’ll appreciate your rental property management software.
At this point in the US and Canadian economic cycle, you may want to focus on good mid market properties which are still available where you can optimize your cash flow. Opportunities for capital appreciation are not as great now.
These top 12 considerations for buying rental properties as an income creating investment should get you thinking clearly about whether to contact a real estate agent or property management company.
You could instead invest in bonds, stocks, gold, bitcoin and other currencies, but none of them will likely produce ongoing cash like rental property does. The severe shortage of housing ensures demand for rental units persists.
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