Rental properties have the potential to be enormously profitable. If your monthly expenses for a rental property amount to about $2,000, and you can charge $2,500 in rent, you'll make a gross profit of $500 every month. That may not seem like much, but if you have a portfolio full of properties, your income can quickly snowball. And if you benefit from property appreciation, you'll see even better results long term.
The thing is, not every rental property has the same potential. Some rental properties are going to be much more profitable for you in the long term than others. So what factors should you be examining when searching for a rental property? Which qualities and elements are most closely correlated with rental property success?
Determining Your Own Strategy: What Is Success?
First, you need to understand that success means different things to different people. Some real estate investors are almost exclusively interested in cash flow, and they won't even consider a property that doesn't reach a certain threshold of monthly profitability. Other investors are more interested in long-term gains, so they're more than willing to forgo monthly profitability if it means better results over the course of a few years or decades.
What's important is that you have a solid strategy for yourself in place. What goals are you trying to achieve? What is your investing philosophy? What is the context of your real estate holdings in your overall investment portfolio?
Working with real estate agents, Houston property management experts, and other experienced real estate experts can make this process easier. They can challenge your biases, teach you new things, address inconsistencies within your strategy, and help you clarify your overall goals. No one should have to pursue real estate investing entirely alone.
The Most Important Factors for a Successful Rental Property
In most cases, these are the most important factors for success in rental property investing:
- Property age and condition. Think about the property age and condition. Generally, the older the property is, the more problems you’re going to have with it. If the property’s in good shape, you’ll have far lower maintenance and repair costs. If it needs extra work or care, it may still be profitable – but you’ll need to work those costs into your profitability equations. You can even hire a professional that offers property styling services.
- Current rental demand. Next, you'll need to consider current rental demand. How many people are renting in this neighborhood? How many people are eager to rent in this neighborhood? When a property in this neighborhood is listed as available, how quickly is it filled? What price is being charged for rent for properties like yours in the area? The more demand there is for your property, and the higher rental prices are, the better.
- Neighborhood quality. Neighborhood quality is a complex concept, but it’s one that’s important to practically every rational tenant. People look for neighborhoods with low crime rates, good schools, and friendly people. The better the neighborhood is, the more people are going to want to live there – and the more they'll be willing to pay for the privilege.
- Access to transportation. People want to live in properties with access to transportation. If the property is near a main road or preferably, several main roads, it's going to be associated with much higher demand. The same is true if the property is near a bus stop or alternative mode of public transportation.
- Access to amenities. Access to amenities is also favorable, as people want access to gyms, parks, libraries, grocery stores and other accommodations. Convenience is hugely beneficial to tenants.
- Job opportunities. You should also keep an eye on job opportunities in the area. Neighborhoods near major employers tend to see faster, more aggressive growth than their counterparts.
- Long-term momentum. Next, think about the overall long-term momentum of this neighborhood. Look at factors like total population, rental prices, vacancy rates, and economic growth to determine where things are headed. Is this area in an upswing or a downswing? Where do you see things going over the next 10-20 years? How could things change during that time?
- Vacancy rate. Vacancies have the power to crush even the most promising rental property investments, so it’s important to look at the vacancy rate of this property as well as the neighboring properties that surround it. If vacancies seem to be a problem here, take it as a red flag.
- Purchase price. One of the most common rules of thumb in the real estate investing world is the one percent rule, which advises property investors to only consider properties that can justify charging gross monthly rent that exceeds one percent of the purchase price. Obviously, this isn’t a hard rule and it’s not going to make sense for every property or every investor. But it does clarify just how important your purchase price is. Almost any rental property is worth considering purchasing if the price is right – and even a hypothetically perfect property is worth dismissing if the price is too high.
If you can find a property that meets or exceeds expectations in all these categories, there’s a good chance that it will make for a successful rental property. Of course, as with all financial decisions of this magnitude, it’s important to be thorough with your due diligence and explore many options before making an offer.
