Residential rental properties are one of the most powerful ways to build sustainable wealth that can last for generations. However, like most investments, there are various factors that go into making an investment property worth pursuing, that will help maximize your returns and avoid potential headaches.
A neighborhood with a very high vacancy rate has several implications. For starters, this means that the area is probably not very desirable, since the demand for rentals is low. In addition, a rental property owner in a high vacancy area will have trouble sourcing good tenants being that supply of rentals is very high. If there is not a large pool of potential renters, it is very difficult to both fill your vacancy and keep your property consistently rented. Analyzing vacancy rates in a given market is key to finding a high performing rental.
Rent to Price Ratio
The rent to price ratio is the percentage of the total purchase price that one month’s rent represents. For example, a property that costs $100,000 and rents for $1,000 per month has a rent to price ratio of 1%. This is considered a very healthy rent to price ratio. In many high priced markets, this percentage is very difficult to achieve, which implies that your cash flow will be much lower in comparison to your initial cost to acquire the rental. Finding a healthy balance between cost and rent is key in finding a good income property.
Certain high priced markets have very high property taxes. This is a cash flow killer. The cheaper the property taxes, the higher your cash flow. It is important to find a market with affordable property taxes in order to keep your holding costs to a minimum.
Great amenities make a neighborhood more desirable and therefore increases the demand for rentals. When analyzing a market, try and take into account what nearby shopping and retail there is. Are you near public transportation? Is it easy to get around? What sorts of parks and recreation are open to the public. These are all factors that go into making a market prime for rental investment.
Many coastal markets have very high insurance costs. Florida has very high insurance costs due to the frequency of hurricanes and tropical storms. California may have high insurance due to the amount of earthquakes, wild fires and other natural disasters. Finding a market with a manageable cost of insurance is another huge factor in determining whether a property will provide steady, consistent income.
Job & Population Growth
Is the population in your market growing or shrinking? Is there enough employment opportunity to sustain the current population? Are their major employers in the area that can provide long term employment and tax revenue for the city? A city with a shrinking population is probably not ideal for rental property investing. It implies that rental demand will be decreasing and therefore not offering the long term growth one would expect when investing in an area. Take a look at the population trends in a given market to ensure that you are investing in a growth market and not a dying city. To have a better understanding of what the job market is like in a particular neighborhood, browse through the U.S. Bureau of Labor Statistics website.
Good schools equals good tenants. Being in an area with A schools is something that will always make renting desirable. Everyone wants to get their kids into the best schools. This means that a rental property in a great school district is going to attract renters that care about their children’s education and that says a lot about the quality of potential tenants you will find.
The crime rate is an obvious metric as to whether renting in an area is desirable or not. No one wants to live in a war zone and this translates into low quality renters, higher than normal vacancy rates, and higher risk of owning a rental in such an area. Not to mention the safety issues of spending too much time in a high crime area.
Didn’t Find What You’re Looking For?
Searching for income producing property can be stressful and difficult, which is why it is important to hire an expert in this field. At Rovira Realty, we spend most of our time sourcing deals and finding the perfect investment properties for our clients, while also helping them manage and maximize their returns
Get in touch with us today if you have any questions or want to maximize your rental property!