Buying an investment property can be a huge step toward financial growth. Even though making money in real estate is possible, there’s more to it than buying the first decent property you see or even one you fall in love with. That’s because what to look for in an investment property is different than what one might look for in a future home. The two have different sets of considerations to bear in mind.
Investing in rental property can be a risky business and acquiring the wrong investment property can obliterate your returns. So, before you purchase a rental property, there are a number of factors you will need to consider. Here is a list of what to look for in an investment property that you plan to rent out:
1. The Location of the Rental Property
Location is a very important aspect of what to look for in an investment property. The location of a rental property is just as important as the property itself.
You should select the neighborhood wisely and ensure that it’s an area that tenants would want to live in. Make sure that the location is a safe one. It should be close to amenities like shops, gyms, public transportation, and hospitals.
You should buy rental property in an area that has an ample supply of tenants, such as near a college community. An area with a high occupancy rate will ensure that you have consistent rental income. Such an area will also have more potential to appreciate over time. High real estate appreciation means that property value will increase faster.
Your ideal location will also depend on the type of tenants you are hoping to attract. For instance, if you intend to rent to families, you should focus more on rental properties in established neighborhoods with decent schools.
2. The Condition of the Rental Property
When buying an investment property, functionality is key. Aim to find a rental property that has all of its important pieces in working order. It is okay to buy a fixer-upper. However, you should be realistic about the money and time it will take to improve the rental property, especially if it is your first rental property. Rental properties that need many repairs usually end up having more problems than anticipated. This can greatly increase the costs, especially if you are not doing the repairs yourself.
Hire qualified personnel to conduct a thorough home inspection. Find out how many repairs you can do yourself and those that would require a professional contractor. Get estimates of how much it would cost to pay someone for the major repairs.
Note that it is important to fix all serious issues before letting in a tenant. This is because a house that isn’t safe can have greater consequences if the tenants get hurt or affected in a bad way. So, figure out the time period that the repairs would need to be completed before the investment property is ready to be marketed to tenants.
If the renovations are too expensive and/or would take too long to be completed, it may not be worth it. You may be better off paying a little more for a better rental property with a minimal need for repair. With a nicer property, you will end up having less overall costs each month. Having a rental property that is in good condition with a few nice extras may also entice future tenants to pay a bit more.
3. Maintenance Costs
Another aspect of what to look for in an investment property is its maintenance costs. When buying a rental property, you should look at how much ongoing upkeep it is going to need. All rental properties will require regular maintenance. However, some investment properties will need higher maintenance or may take more time to maintain than others, such as student rentals and vacation rentals.
It is good to be honest with yourself about the amount of work you can do on your own. Can you handle the maintenance needs of the rental property? Are you close enough to manage the property yourself? If you can’t, you can hire a professional property manager to do the work for you. However, this will also be another cost you need to consider.
4. Estimated Return on Investment
Estimated return on investment is another key piece of what to look for in an investment property. Regardless of your rental strategy, when it comes to finding the best investment property, a good ROI is a must. Calculating the return on investment will ensure that your investment property will be a profitable one.
The most common metrics used to calculate return on investment in real estate investing are the cash on cash return and the cap rate. Both of these metrics are useful in assessing a rental property prior to purchasing it. These metrics can be used for different types of investment properties but are mostly used for assessing rental properties before purchasing them.
Analysis of return on investment opens the door for other important analyses that may be conducted. It is useful when conducting both real estate market analysis and investment property analysis. Try using Mashvisor’s ROI calculator to find and analyze the best investment properties in the market.
The Bottom Line
Buying a rental property is a major investment for many people and can be a lucrative one. Every real estate market has good cities and every neighborhood has good rental properties. However, it takes a lot of research and skills to line up all three. The above list of what to look for in an investment property will help you find the most profitable investments. If you are looking to own the perfect rental property, be sure to take them into account when you start looking at potential investment properties.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.