Making Sure You’re Buying a Profitable Rental Property

When searching for a rental property, your base objective is always profitability. A rental property generates profit not only via monthly rental income but also from its eventual sale after rising in value.

According to Pete Evering at Utopia Management, you should assess the profitability of a by examining its associated financial burdens, its surroundings, and the state of the neighborhood and the town or city where the property is situated.

Property Taxes

When examining taxes on a potential rental property, it’s not just about highs and lows. While a low property tax may be favorable in circumstances that allow a relatively high monthly rental rate, it won’t be as helpful to you if the property in question must be priced lower to realistically attract tenants.

Taxes may also be unexpectedly high for a property of comparably low rental value, but high taxes shouldn’t scare you off right away. On a property situated in a fantastic location, with the potential to attract long-term tenants and rise substantially in value, high taxes shouldn’t be a problem.

Remember, tax rates are never set in stone and can rise or fall at the behest of city governments, so do some research to determine if property taxes are expected to go up in the near future.

Permits

You might be planning on buying a “fixer-upper” that requires heavy renovations both inside and out, or a home in good shape that just needs a new driveway, a new mailbox, a fresh coat of paint, and some trees.

If you’re planning to make alterations — especially external ones that affect the terrain and vegetation around the property — make sure you’re not stepping on the city’s toes. Getting hit with fines because you’ve made alterations without the requisite permit will put a dent in your profits, and buying a home in a city or town that will prohibit you from making needed improvements may choke your investment before it can grow in value.

Neighborhood

Who’s in your neighborhood? Are they mostly families, mostly single young professionals, or is it dominated by college students? The typical age and occupational status of neighborhood residents will determine your approach since people in different stages of life have different desires, needs, and requirements when renting.

The head of a family household is willing and able to spend more and stay longer, but probably has higher standards; college students have lower budgets, often require a cosigner, and may not want to rent during the summer, leading to vacancies.

Jobs

Where there are new jobs, there are new residents in need of housing. Large corporations establishing hubs or headquarters will create a boomtown effect, and the smart real estate investor will seek out areas where an influx of work opportunities is expected.

You’ll have no shortage of renters in this scenario, and, depending on the type of industry moving in, the local economy may grow considerably, with that economic valuation bleeding over into the value of real estate. Look at local development plans as well; as a general rule, nearby construction usually signals an overall rise in property values.

Crime

When assessing the overall status of a neighborhood, crime rate is an important statistic. Renters are equipped with all the same research tools as landlords, so local crime stats are freely available to them, and they may not want to risk living in an area that looks dangerous.

Think about the police presence around the property you’re interested in; some potential tenants may feel uneasy if the neighborhood feels overpoliced, while others may be reassured. Your ideal rental property is situated in an area with appropriate police presence compared to its crime rate, which, ideally, is low.

Natural Hazards

Nowhere is entirely safe from natural disasters. Before purchasing a rental property, consider the natural hazards endemic to the area. There may be a risk of floods, tornadoes, or earthquakes, depending on where you are, with each introducing the need for an insurance plan.

Sometimes insurance companies will work hard to avoid paying out, leaving you with no option but to pay out of pocket for repairs. On top of that, you’ll be the one on call when nature disrupts the lives of your tenants, such as a flooding situation.