Buying rental property is a favored investment these days. Many investors are taking their money to the real estate market hoping to get a foothold and grow their portfolio. It’s a great way to build passive income but it takes a bit of work and some strategy.
Rental property investments should be considered on a long term basis. They need to build capital and grow your cash flow giving you more income. At the same time rental properties can appreciate in value and that can be a great asset to growing your portfolio. Take a close look at these aspects of any rental property before you decide to buy.
The livability of the neighborhood and the amenities in the area will be key factors. Your ability to attract and retain tenants will be greatly affected by the surrounding area. If you have a large selection of quality tenants to choose from you can generally charge higher rent. The neighborhood you invest in will directly impact your bottom line.
When buying rental property look for places close to schools, hospitals, shopping, and public transportation. Consider what you would like to have near your home and your tenants probably feel the same. Most people would likely appreciate local libraries, community centers, and parks.
Commercial properties depend on their neighborhoods for employees, customers, or both. Make sure your commercial tenant will be able to acquire what they need in the area. If not, they will likely struggle and might even be unable to pay their rent on time.
Average Rent In The Area
The amount of rent you can charge will determine how much property you can afford to purchase. Do a bit of research and find out what tenants in the area are paying for comparable places. Get a sense of the local market value before you consider buying rental property.
Once you know the average rents you know what kind of income you can expect your new property to generate. Add up the costs associated with financing, owning, maintaining, and managing a rental property. Then compare the numbers to determine if a rental property you are considering is a financially feasible option for you.
Local Supply And Demand
Supply and demand are important considerations for any business and the rental market is no exception. Ideally you want to be buying rental property in an area where the demand for units such as yours is high and likely to remain that way. Take a good look at the local market, trends, and forecasts.
A high vacancy rate is a sign of trouble. It’s a good indication that acquiring and keeping quality tenants might be more difficult than you expected. From an investment perspective the last thing you want is to have no choice but to lower rents just to keep units occupied.
Local Job Market
One of the most important external components of a successful residential rental property is the availability of jobs in the area. Tenants will need income to pay their rent and other expenses. If there are not enough well paying jobs your tenants may have to leave in search of work.
A healthy job market increases demand for housing. If you’re lucky enough to stumble upon a growing job market there is a good chance that demand will grow. This means that you may be able to raise the rent and there’s a good chance that the property will appreciate in value, securing your return when you are ready to sell.
There are many expenses associated with the rental property market. A good chunk of your income will be going towards property taxes. It’s good to do your due diligence and find out what local property taxes are like.
Struggling towns may have higher taxes to cover their expenses. It is an unavoidable expense that you will have no control over. You don’t want to end up in a situation where the amount of rent you can realistically charge only covers the property taxes.
It’s important to look at current neighborhood amenities and job markets but keep an eye on the future. If there are plans for development there might be good potential for growth. Keep an eye out for big projects as well as abundant construction activity.
A neighborhood with a new subway line under construction will probably expand and grow. It may be prime time for buying rental property in this area. You may be able to purchase a property at a reduced rate now and then reap the benefits of all that growth later.
Not all developments will affect every property in the same way and some may even hurt the market in the area. Consider what kind of property you are planning to buy and how developments are likely to impact your tenants. It may take a bit more planning and research but an area experiencing growth and development is a good place to look.
If you’re considering buying rental property you must have a good grasp of the unique strengths and weaknesses of that property type. Think about the kind of landlord you want to be and how much of the work you plan to do yourself. Consider your skills, abilities, and available time before making a decision.
Condos are a low maintenance option since they take care of external repairs and maintenance but you will likely be able to collect less rent. Condos also tend to appreciate more slowly if at all, depending on the area. Another downside to condos is that you will have to pay condo fees for all that maintenance and in aging buildings, or if the finances are not being managed very well, those fees can be very high.
Single family homes usually require a larger initial investment but they tend to bring higher rents and attract a greater number of long term tenants. Multiplex units and commercial properties are often the best for cash flow but it’s unlikely that you can find one cheap. Properties such as these usually require an investment of millions.
As you acquire rental properties and grow your portfolio your workload will also increase. As a serious investor you don’t want to limit your growth potential to how much you can get done in a day. Sooner or later you will need help managing your properties and a great place to start is at Property Matrix. With the right tools you can experience unlimited growth.