Investor Advice: The Profitable Rental
by Josh Feinberg
The quality of a neighborhood influences both the types of tenants you attract and the rate of your vacancies. If you buy near a university, your pool of potential tenants are going to be students and for that you will expect to have vacancies on a regular basis since many students return home for the summer.
Remember that property taxes are not standard across the board. To determine how much you are going to make on rent you need to factor in how much you are going to lose from property taxes. Another thing to remember is that high property taxes are not always a bad thing and should only be considered if the rental is an excellent neighborhood.
Make sure your rental property is in the vicinity of a decent school. The quality of a school can affect the value of your investment. If the school has a poor reputation and low test scores from its students your rental property is bound to suffer since schools with low test scores are ranked lower.
Make sure your rental property is in a location that has growing employment opportunities. It will attract more potential renters to the area since many workers want to be close to where they work. Read the business section in your local paper to see if a new major company is moving to the area because it will have a huge pool of employees who will want to rent.
Check to see if the area where you want to purchase your rental has core amenities such as malls, gyms parks and movie theaters.
A good area to purchase your rental is one where there are new condo complexes, newly developed business parks and malls.
Listings and Vacancies
If there are a high amount of listings in the neighborhood it is an indicator that there is a seasonal cycle or that the neighborhood has gone bad. Make sure you figure out which it is before you buy in. Also, decide on if you can cover rent for any seasonal fluctuations in vacancies. Vacancy rates will give you an idea of how successful you will be at attracting tenants. High vacancy rates mean lower rents in order to snap up tenants. Low vacancy rates will allow you to raise rental rates.
Know what the average rent is in the area and remember that charging the average rent is not going to be enough to cover your mortgage payment, taxes and other expenses.
The best investment property for beginners is a residential, single-family dwelling or a condo. Condos have low maintenance because the association is there to help with many of the external repairs, leaving you to worry about the interior. Because they are not truly independent living units they tend to garner lower rents and appreciate more slowly than single-family homes.
Single-family homes attract longer-term renters that are usually families and couples. Two adults in a relationship are generally better tenants than one person since they are more likely to be financially stable and pay the rent consistently.
Appreciation and Cash flow
When you have your neighborhood narrowed down, pick a property that has appreciation potential and good projected cash flow.
To determine appreciation you want to look at a property that has few cosmetic changes. Cash flow, you are going to have to make an informed guess based on the following:
Take the average rent for the neighborhood.
Subtract it from your monthly mortgage payment, property taxes, insurance costs and reserves for maintenance and repairs.
Josh Feinberg has over 10 years of experience as a Realtor in the San Francisco market and over five years in the greater Phoenix/Scottsdale region where he currently works with Crest Realty Group, a firm specializing in REO properties and short sales.
American Apartment Owners Association offers discounts on products and services for landlords related to your rental housing investment, including rental forms, tenant debt collection, tenant background checks, insurance and financing. Find out more at www.joinaaoa.org.