Rental property can be a reliable way to generate passive income on a consistent basis. But for most newcomers, it’s extraordinarily difficult to find and evaluate potential properties to add to their portfolio.
What’s the best way to evaluate your first property and maximize your chances of turning a profit?
What Makes a Rental Property Successful?
Let’s start by looking at some of the factors that make a rental property successful. The general idea is to find a reliable tenant and charge them rent that exceeds what you’re currently paying and ongoing monthly expenses. Over time, you’ll also want your property to appreciate in value so your investment continues to grow.
In order to accomplish that, you’ll need to focus on factors like:
Neighborhood. One of the most important factors for the present and future value of your property is the neighborhood in which it resides. People want to live in good neighborhoods with low crime rates, great schools, and plenty of amenities to enjoy. While the quality of the neighborhood is somewhat subjective, many of these factors can be quantified and easily analyzed. The only important caveat here is that better neighborhoods typically lead to higher property prices, making it more difficult to find a good deal in a highly competitive area.
Condition. You’ll also want to consider the condition of the property. If a piece of real estate is in a good area and could attract many potential tenants, that’s a great start – but if it needs tens of thousands of dollars of work before it can ever be rented, it may not be worth your investment. Similarly, older homes typically require more maintenance and repairs than newer homes; this shouldn’t keep you from purchasing older homes, but it should enter into your calculations.
Space and occupancy. How much space is there to work with, and how many occupants could you have in this building? If you’re ambitious, you could transform a home to support multiple different families.
Demand. How much demand is there for housing in this neighborhood? Do other landlords have an easy time filling vacancies, even when charging significant rent? Or are there many vacant properties that seem to go perpetually unfilled? Vacancies can ruin your financial model, so make sure you take them seriously.
Sale price. House pricing growth has decelerated, but we’re still living in a time when the real estate market is hot, and prices are incredibly high. There are some amazing properties out there with lucrative renting potential, but the purchase price is simply too much to justify an acquisition by a real estate investor.
Potential rent. Think about the potential rent you could charge at this place as well. One of the best ways to estimate this is by looking at similar homes in this neighborhood and seeing what they charge for rent. Ideally, you’ll be able to charge significantly more than you’re spending each month on regular expenses.
Growth potential. Finally, pay attention to the growth potential of this house and this area. Is this neighborhood on an upward trajectory? Are property values consistently rising in this area? Are there new developments like better employment opportunities, new forms of transportation, and exciting new establishments in this area? These are all indications of high potential growth.
Shopping Around
Finding a property with passing grades in all these categories and more can be a challenge, but there are a few strategies you can use to find success.
Hire a real estate agent. First, hire a real estate agent to work with, period; even if you’ve had some experience buying or owning houses in the past, chances are, your real estate agent will have even more experience. They can help you sniff out better deals, review potential homes more thoroughly, and even connect you to other resources you may need.
Remain patient. Try to remain patient. New real estate investors are often eager to get started with a purchase as soon as possible, but this is self-defeating. It’s much better to take your time, stick to your values, and only make a purchase when you’re truly ready.
Look for unconventional opportunities. When prices are relatively high, you may have to look around for unconventional opportunities to find a better deal. For example, you could buy a foreclosed home or attend a real estate auction; just make sure you investigate these properties thoroughly before committing to any purchase.
Effective property managers and real estate investors are scrutinizing and discerning. They don’t buy every property they come across, nor will they sacrifice their own investment strategy for the sake of equipment purchase. It may be months or longer before you find the perfect first property to add to your rental property portfolio – but your patience will be worth it.
