Are you looking to purchase an investment property? Buying rental property is one of the best ways to diversify your investments, create a steady income stream, and build long-term wealth. However, it is not a get-rich-quick scheme. It’s a tough business that’s accompanied by a myriad of risks that can obliterate your returns. And with a wide range of properties to choose from, selecting which one to buy can be quite overwhelming. Understanding what makes a good rental property is what will make the difference between a profitable rental investment and a money pit.
So how do you know if a rental property is a good investment? The good news is that there’s a universal cheat sheet on what to look for in a rental property. There’s no need for reinventing the wheel. If you have been wondering what makes for a great rental property, this blog is for you.
Qualities That Make a Good Rental Property
Here are the most important things to take into account when shopping for a rental property:
1. Located in a Growing Real Estate Market
When it comes to ‘what makes a good rental property’, location is the single most important factor to take into account. The location of your rental property will have a strong impact on rental demand, the quality of your tenant pool, the optimal rental strategy, and ultimately the rate of return on a rental property.
If you purchase a rental property in an underdeveloped area, it will be hard for you to attract tenants. The likelihood of the property gaining value is also minimal is such areas. If a housing market is declining, the value of the property will also decline. You want to buy an income property that is situated in an up and coming market. If the market is growing, so will the average rental price, tenant quality, and property values.
Remember, return potential can vary from city to city and even within the same city. Therefore, it’s important that you carefully study the location of the investment property at both the city level and neighborhood level. But how do you spot profitable locations for rental investment?
Here are some of the best indicators that a rental market is hot:
- Big and growing population
- Public amenities (schools, hospitals, restaurants, gyms, etc)
- Growing job market
- Lower crime rates
- Public transportation
- Future development
- Favorable property taxes
- Low insurance costs
- A low number of rental listings
Related: Best Rental Investment Markets 2020: 10 Features
The most effective way to find a profitable neighborhood in your city of choice is to conduct a neighborhood analysis using Mashvisor’s real estate heatmap. With this tool, you can easily identify neighborhoods that promise a high rental income and cash on cash return.
To start searching for the best locations for income property across the US housing market, click here.
2. Property Management Options
Property management plays a crucial role in the success of your real estate investment. However, it’s not always possible for you to manage the rental property yourself, especially if it’s an out-of-state rental property. Unless you have the time and will to take on your rental property as a full-time job, you may need to hire a property manager.
Therefore, the availability of quality property management companies in the area is integral to finding a good rental property investment. A good property management company can also help improve the performance of your rental property.
3. Single-Family Homes
Real estate investors can earn rental income through different types of properties. For instance, you may choose to buy a single-family home, an apartment complex, condo, or commercial property. But what is the best property type for you?
While it’s possible to buy any property type and be successful, single-family homes are usually the best for beginner real estate investors. When done right, they are typically more affordable, easier to finance, easier to maintain, and appreciate faster. You will also be dealing with only one tenant, which is less stressful. Moreover, single-family homes typically attract longer-term tenants and are easier to sell than multifamily homes.
4. Attractive Household Amenities
When looking for a good rental property, another thing you should keep in mind is the desirability of the internal and external features of the property. Tenants want a house with qualities that make their lives more comfortable. They may include:
- Outdoor space
- Air conditioning
- Parking space
- Built-in wardrobe
- Modern kitchen
- Separate dining room
- More than one bathroom
- Storage space
These amenities help a rental property attract tenants and retain them for longer. They also add value to the investment property and will allow you to charge higher rent.
5. Good Property Condition
Repair and maintenance costs can have a huge impact on rental property cash flow. Therefore, when assessing a rental property for sale, be sure to conduct a home inspection to know its condition. A good rental property will be in sturdy condition and need minimal repairs. A fixer-upper may require a lot of your effort, time, and funds before it’s rent-ready.
You don’t want to deplete your emergency funds with major repairs soon after you’ve bought a rental property unless you are an experienced real estate investor.
6. Priced Within Your Budget
It is really important that you know how much you can afford to spend on a rental property. You should then find rental properties that are within your budget. Don’t forget to factor in some cash reserves in case of unexpected expenses like vacancies. Buying an investment property that is beyond your budget causes a lot of financial strain.
7. Priced in the Median Range for the Area
Another big consideration when looking for a good investment property is its value relative to what you are paying for it. Just because you can afford it, doesn’t mean that it is a good real estate deal. You should check whether it is really worth the price.
To avoid overpaying for an investment property, you should conduct a comparative market analysis to find the fair market value. This entails looking at what other comparable rentals in the area have recently sold for. A good rental property is priced in the median range for the area.
Related: How to Value Rental Property: The Ultimate Guide
8. Positive Cash Flow
The way to make money from a rental property is through cash flow. Rental property cash flow is the difference between monthly rental income and monthly rental expenses. But how much profit should you make on a rental property? Ideally, your rental property should generate strong positive cash flow each month. This means that the rental property puts money in your pocket each month. Therefore, you will have funds to save for emergency expenses and grow your rental property portfolio. The more the cash flow, the better.
The best way to calculate potential cash flow for a rental property in the US housing market is to do a rental property analysis using Mashvisor’s rental property calculator. The tool will give you numbers for both Airbnb and traditional rental strategies. This makes it easier for you to determine whether the property you are assessing would make a good vacation rental property or a good long-term rental.
Related: Investing in Income Properties: 8 Steps to Positive Cash Flow
9. A Good Return on Investment
Apart from cash flow, you should also determine how much profit you will receive relative to how much you invested (return on investment). The most common return on investment (ROI) metric is cash on cash return because it takes into account how the investment property is financed. Basically, most investors will use a mortgage loan to finance their investment property. It is calculated by dividing annual net income by the total cash invested.
A good rental property will generate cash on cash return of 8% or more. Again, you can use our calculator to compute ROI metrics (cash on cash return and cap rate).
Related: What Is a Good Return on Real Estate Investment?
The Bottom Line
Successful real estate investing starts with knowing what makes a good rental property. The last thing you should do is to get emotionally involved. To get the best returns and avoid possible financial loss, always take into account the above factors when analyzing a rental property for sale.
However, be careful not to be frozen by indecision due to analysis paralysis. Don’t try to find the “best” property. Technically, it doesn’t exist. However, try to find one with most of these traits. Moreover, to overcome analysis paralysis, be sure to use Mashvisor’s real estate investment software to conduct real estate market analysis and investment property analysis quickly and accurately.