A well-rounded asset portfolio may include stocks, bonds, and real estate investments. Over the long term, real estate investing allows you to earn passive income by renting a property to others. The cash flow generated by investment properties can offer a solid, reliable return that helps to balance out other types of investments. You can also build equity by paying down the mortgage and taking advantage of increased resale values in the future.
Before you invest in real estate, you’ll need to understand what to look for in a rental property and which property features attract good tenants. Rather than looking for something that matches your preferences, consider what type of property appeals to a wider range of potential renters.
Location
Certain areas of the country, cities, and even neighborhoods may attract renters due to nearby job centers or universities. City-dwellers may look for neighborhoods with a particular vibe, nightlife, or a bustling arts and culture scene. Suburban families moving to a new area may try to find a rental home close to where they will work, or their kids will go to school.
A quick search of rental listings may point you toward popular neighborhoods for rentals. You can then search for available homes within your price range in these locations. Also, when searching online, pay attention to the average rents in the neighborhood, as they will most likely determine the amount you can charge for a similar property.
Safety
Research a neighborhood’s safety before buying, especially if you’re unfamiliar with the location. Review crime stats and talk to local residents, if possible. If prices for homes in a specific neighborhood seem lower than in surrounding areas, try to determine if safety concerns have brought down average rents. Few people want to live in a community perceived as unsafe, so you might have difficulty finding a tenant.
Walkability
A beautiful home in the middle of nowhere will likely command less rent than a studio in Manhattan surrounded by shops, restaurants, gyms, and entertainment opportunities. Walkable neighborhoods tend to attract renters who prefer to live close to the places they go most often. Renters moving to an urban area will not bring a car with them. This lack of personal transportation influences their desire to find an apartment or home with grocery shops and other necessities nearby. Outside of the city, larger homes suitable for a family make great rentals near schools, playgrounds, and parks. These small, walkable towns, like those found in upstate New York, may entice renters to pay for extra bedrooms for their kids.
Low Vacancy
The current vacancy rate informs prospective investors about the desirability of the rental market in a particular neighborhood or zip code. When buying an investment property, pay attention to areas with fairly low vacancies, where your rental will get attention from renters.
You may have to wait longer to buy in desirable, low-vacancy locations. However, if you’re not in a rush, exercising patience can help you land a good deal on a long-term investment.
Age of a Property
Older properties may have a lower price tag, but you can also expect higher repair and maintenance costs than newer homes. If you have the energy and money for a fixer-upper, you can take an older home, renovate it, and turn it into a profitable rental. If you do go the renovation route, you’ll have the opportunity to install more durable flooring and paint the walls in neutral colors that work best for rental properties. If you need immediate rental income to cover your expenses, you might want to search for properties by build date and find a move-in-ready home that will rent quickly.
Amenities
Rental property investments thrive on amenities. In a crowded rental market, you’ll need to know about some extra features that can help your home stand out and some that may not make a difference to renters. For example, in New York City, renters seek out and will pay more for in-unit laundry. You may also be able to charge a higher rent by offering some of the more desirable features, such as a finished basement, garage, or new appliances.
Parking and Public Transportation
Prospective renters always want to know about parking options or proximity to public transportation. Renters may prioritize their walk to the train, especially in cities with extreme weather. Other renters will pay a premium for a dedicated parking spot, especially in more suburban areas without a strong public transportation system.
If you cannot afford a property with reserved parking, focus your search on neighborhoods with ample street parking. In addition to reserved spots for residents, renters might want to invite guests over, and they will need additional parking options. When you advertise your property, include parking and transportation information.
Updated Interior
A brightly-lit space with gleaming new appliances will look better in pictures and impress renters. Many renters prefer modern, updated features, and they may prioritize homes with newer fixtures, lighting, and decor. Hardwood or luxury vinyl plank flooring, new appliances, a fireplace, or a balcony will attract tenants and help your rental stand out in a dense market.
Less visible features, such as new windows or an energy-efficient HVAC, may not contribute to overall aesthetics, but the promise of lower utility bills and a more comfortable living space will appeal to renters.
Community Amenities
If you invest in a condo or townhome, ask if the community offers extras like a swimming pool, community Wi-Fi access, or a gym. Add these amenities to your rental advertisement as an extra enticement if you include access to these features. Research popular amenities in your area and browse comparable listings on rental platforms to see how much an added amenity increases your monthly rental income.
Profitability
Every investor’s decision about their real estate investment ties back to the property’s profitability. Investors can consider the following factors that impact their ability to generate revenue.
Cap Rate
A property’s cap rate, or capitalization rate, measures the rate of return on an investment property based on generated rental income. However, cap rates may indicate various conditions based on location, market conditions, and property type. Those looking to purchase a multi-family in New York City may seek out low cap rates under 5%, indicating a healthy market with strong income-generating potential.
Long-Term Vs. Vacation
Investors will have to consider whether the type of property they invest in will generate more income as a long-term or vacation rental. In popular destination areas like Nashville and Virginia Beach, investors may make more by listing their property as a rental. White this strategy involves more expenses and effort to find more renters; those renters are typically willing to spend more money per day then a long-term renter in the same location.
Which cities are most profitable for each rental type? Review RentHop’s data study.
Favorable Expenses
Property investors must balance their income and the costs to maintain or add features to a property. Even with a steady source of rental income, one large, unplanned repair expense could negatively affect your cash flow and profitability for the year. Investors should consider how they will afford the following expenses:
Financing Costs
Similar to homebuyers, investors must consider how they will finance their purchase. Some investors may submit an all-cash offer or use a mortgage to afford their investment. Investors with a mortgage can shop between lenders and consider which terms make sense for their situation.
Property owners who plan to rent their home for a long time may consider taking out a loan with a 30-year term. However, those who purchase in a competitive rental market may acquire a ten or 15-year mortgage with higher monthly payments. A shorter loan term could help you meet personal financial goals, such as building equity faster or paying off the mortgage before retirement.
Property Taxes
In addition to mortgage payments, don’t forget about property tax expenses. Divide your annual property tax assessment by twelve and subtract it from the monthly rent you receive. While you may only pay a tax bill once or twice yearly, this amount will impact your bottom line. Do your research about property taxes in the cities or towns where you might want to buy a rental property. You don’t want to receive a shockingly high tax bill six months after you’ve made a purchase.
Maintenance and Repair
The property you purchase will need maintenance and repairs that vary in cost and severity. Ensure you purchase insurance policies covering your property and protecting against common circumstances in your region. For example, those investing in a vacation rental property in Miami should consider a flood insurance policy. Property owners are also responsible for keeping their residences safe for tenants by following fire safety protocols, cleaning allergens like mold, and properly removing lead paint.
Property owners must manage their property themselves or hire a team. Smaller properties, like single-occupant home, may be easy enough for an investor to repair and monitor themselves. However, if an investor lives far away from their property, or owns a popular vacation spot requiring many changeovers, they can consider hiring a management team. Hiring others to complete work for your property will dig into your expenses, but it may be necessary to tend to repairs quickly and keep tenants satisfied. As your rental portfolio grows, you’ll also want to build business relationships with trusted contractors and vendors.
Miscellaneous Expenses
Your list of additional rental property management expenses may include concessions, like free rent, that you have to offer in a slower market and advertising expenses. Many New York City renters sign their leases in the summer, but if you need to list a unit for rent in the slower winter season, you may need to deduct a few hundred dollars from the monthly rent or entice a prospective tenant with a free month at the end of their lease.
Investors should also budget for vacancies between tenants. Long-term rentals may have a full month or season without a tenant, which can directly decrease your profit. Vacation rentals may receive fewer bookings in the off-season.
Conclusion
Real estate investors should consider various factors to increase their profits. By understanding their current market and the average rent in their area, investors can set a rental price that reflects their location, amenities, and size. Investors should also look for appealing financing options that will decrease their expenses. A profitable rental property can become a lucrative investment that owners can use through retirement.
