Real estate offers many investment formats, though the most commonly known are rehabbing and flipping. Building a portfolio by acquiring rental property is also a good investment strategy but remember – Not every good property makes a good rental property! When considering purchasing a rental property, it is important to focus on aspects that can make a rental property stand out.
Location. Location. Location. This is the gospel about any kind of real estate property, be it rental, residential, commercial, retail or investment. If a property does not have a favorable location, you can be sure, demand will invariably be compromised. Put yourself in your customers shoes. Since rental decisions are based on first impressions and perceptions, the smallest negative can set back long-term rental values. Unlike short term flips, with a rental property a five to ten-year horizon is ideal, meaning you need to have a long-term perspective for the area you are buying in. Talk to other owners in the area to see if they have insights on future development plans for the area. A planned new school, or medical center or even a commercial development will certainly bump up holding value over time.
Rental property goals. Before jumping in, it is advisable to have a clear fix on the short and long-term goals for the investment, since they will determine the level and kind of work you will put in and future upgrades you make. So, the question to ask is – Am I looking to generate monthly cash flow or long-term capital gains? If you only plan on renting out the property for two or three years, chances are you will keep away from expensive upgrades. On the other hand, if you are planning on renting until the property is free and clear, you may consider upgrades and repairs that will enhance curb-appeal and perceived property value. The right decisions will help maximize returns and most likely impact your future investing decisions. Sometimes a sudden jump in value can tempt you to sell before the anticipated ten-year horizon. Or an unforeseen financial circumstance can force you to liquidate. The best of plans can change along the way, but your goals will help you these changes.
Financial considerations. For a rental property, financial considerations are all important. New investors may not have an idea of all the costs associated but should take into account property management costs like utilities, landscaping, repairs and other items. Even the cost of vacancies, should be factored into the overall cost of ownership, which includes beyond loan financing, mortgage, interest amount, taxation and insurance costs. The more you know about comparable homes in the area, the better equipped you are for determining rental value for own property. Take time to talk to agents to get the lie of the land. And if you are planning on getting a property management company onboard, make sure they understand the scope of work involved in managing your rental. That way, you can come up with the real cost of ownership and yield.
Understand your market. Before finalizing a purchase, spend time to understand what investment into the property will yield the best return? Tenants will invariably seek out the most comfortable option, but not necessarily be ready to shell out the extra dollars! Take time to research what’s on offer in the area. Understand what it will take to keep your rental occupied with minimum vacancy gaps. People like to rent homes they are comfortable in, but not willing to pay the extra price for it. Not always! Renters will often place a premium on a driveway, and a garage. Consider investing in one if it will allow you to charge a higher rental and ensure your property retains demand. An outdoor patio may seem like a good idea, but if the cost of putting one in, does not justify the small rental gains, you’re better off without it.
A good rental property is indeed a good business proposition and can help grow your portfolio. But get to know everything about the property and the market to get the best return on your investment.
