Property can be an exciting and rewarding investment vehicle. A good investment property will generate cash flow while you’re building equity in an appreciating asset. However, difficulties come when trying to find and identify that great property that offers the best opportunities for wealth growth.
The careless investor could quickly find themselves absorbing a loss instead of reaping the rewards. This is why it’s important for investors to carefully research real estate market trends and understand what exactly they need to look for in an investment property before they take the next steps.
In this article, we outline 6 important aspects to consider when looking for your next investment property.
Before you even look at the property you need to know where to look. The location of the property will determine how easy it is to fill your rental and the quality of tenants that you acquire. For example, if your property is near a university then it’s likely that the majority of the renters in the area will be students. Alternatively, if the property is in an area of low population density you will likely find the number of applicants you receive is lower than if your property were more centrally located. This will result in longer vacancy periods and the ability to command much lower rent.
Other principle factors to consider when evaluating the best location for your rentals include the availability of jobs, the number of schools in the area, future economic and infrastructure investments planned by the local council, and the area’s crime rates.
2. Appreciation Potential
While most investors agree that you should first focus on cash flow, rental property appreciation can be a big driver in wealth growth. When looking for your next investment property then you should ask yourself whether this property has good appreciation potential.
Factors that affect a property’s appreciation include investment and growth in the area. For example, you might know that a number of large companies are opening offices in a particular town bringing with them new jobs.
Additionally, ask yourself questions such as does the property have space that could be converted into more rooms? Or could you convert it into multiple units? You don’t have to develop the property immediately, but it’s great to have the option to increase your property’s value and rental income in this way.
3. Competition And Rents
As part of your initial market analysis, you should look at the number of rental property listings in the area as well as the average rent amounts that similar properties are charging. If a neighborhood has an unusually high number of rental listings, it may signal a seasonal cycle or that the neighborhood is in decline. In either case, high vacancy rates force landlords to lower rents to attract tenants. Low vacancy rates allow landlords to raise rents.
Make sure that the rent you get from the property will cover your mortgage payment, taxes, any other expenses and still be cash flow positive. Additionally, you should try to gauge the direction of the area over the next 5-10 years. If you can afford the area now but jobs and renters are leaving the area, or taxes are expected to increase, a profitable property today could mean swallowing a loss later.
4. Know Your Numbers
Before you buy it’s essential that you do a thorough financial analysis of the property. You should consider fixed and variable costs including property taxes, HMO fees, potential vacancies, LLC costs, insurance, mortgage payments, and even estimated maintenance costs. Once you have these costs you can do research on the area to determine what you can reasonably expect to command for rent on the property in question.
Ultimately, you want to know that your investment is going to be cash-flow positive. When you’re working on the numbers, keep in mind that just because rent prices are higher in a certain area doesn’t mean you’re going to come away with positive cash flow at the end of the day.
5. Amenities Renters Are Looking For
Renters will make a decision to rent out your property based on a number of factors. These commonly include things like distance from their work, the number and quality of restaurants, bars, cafes in the area, the availability of public transport, parks, and gyms.
The local City Hall may have promotional literature that can give you an idea of where the best blend of public amenities and private property can be found. It’s also worth noting that more recently, due to covid, many renters are looking for properties with private outdoor space, and office space.
6. Practical low maintenance
Finally, after analyzing all the above details you can actually look at the property. Bear in mind that flashy high-value investments or low-quality properties often come with much higher maintenance costs which can quickly eat into your profit margins. Unless you are particularly confident at running development projects you may also want to avoid fixer-uppers as well.
Ideally, you should look for property that is ready to rent out now, that is below market value, and which doesn’t have any obvious expensive maintenance needs (eg. a pool).
Every state has good cities, every city has good neighborhoods, and every neighborhood has good properties. However, it takes a lot of research and legwork to narrow it down to that great property. When you do end up finding your ideal rental property, keep your expectations realistic, and make sure your own finances are healthy enough so that should the unexpected occur or the property doesn’t rent out immediately then you can afford the property costs before it starts generating cash.