How to Recognize a Profitable Rental Property
Do you love the idea of someday becoming a landlord? There are plenty of available homes, condos, and multi-family properties you could purchase to rent out but how do you choose the right rental property?
If you have the capital and the dream, here are a few ways to recognize a profitable rental property.
Makes Profit Right Away
Many potential real estate investors evaluate property by what could be. That is, they calculate how much money a property could make for them after extensive renovations. That’s a mistake.
Rather, you want your rental income to cover your costs and provide you a positive cash flow immediately. Real estate experts recommend looking for properties that will bring in enough income in 10 months to cover all costs including the mortgage payments, insurance, and taxes.
Another common rule is that your rent should be 2% of the purchase price of the property. Look at other rental listings in the neighborhood to get an idea of what you could charge for rent. Then do your calculations and see if your rental amount will cover all of your costs and still leave you with a little extra profit.
DOM Going Down
DOM stands for “days on market.” This means how long a property has been for sale.
If the DOM of properties in a neighborhood is going down on average, that means the housing market is getting stronger. For the potential investor, that makes it a good time to buy, as this usually happens right before prices start going up.
You may still be able to get a good deal on a rental property that will earn strong rental income and appreciate when it’s time to resell. However, it’s also important to check rental listings in the area as well. You want to make sure landlords aren’t offering concessions such as free rent as this may mean they are having trouble finding tenants. If that’s the case, you may want to look elsewhere.
Neighborhood Factors
You want to look at the surrounding neighborhood and see what types of businesses are there. In particular, a high presence of gourmet groceries or trendy stores that appeal to those with disposable income is a good sign.
Try and get a feel for what kind of tenant the neighborhood would attract. Consider the school district of potential properties and look for properties with good public transportation nearby.
Already Great Tenants
You may be looking at a rental property where you are inheriting tenants from the previous owner. You want great tenants in your property so make sure to run a background check as well as a credit check on all current and potential tenants. Don’t just take the landlord’s word for it that they are good tenants.
If you find an issue, it may be a way to negotiate a lower price for the property given that you may need to evict the tenant. In addition, make sure your tenants have enough money to pay the rent by asking for recent pay stubs.
Don’t just buy any old property thinking that it will make you money when you rent it out. Carefully evaluate it using the above factors. With a good neighborhood, great tenants, and a profit from the very beginning, you are on your way to having a successful rental property.