Knowing what to look for when buying a rental property will save you time and money while reducing stress. In this article, we outline seven considerations that you can’t afford to overlook.
Consideration 1: Location
Location, location, location is consideration No. 1 when buying a rental property.
Is the property close to amenities such as shopping? How about public transportation? What about local schools? Is the area safe? Is it family-friendly?
Know which location(s) meet your requirements, and only consider properties within those areas.
Consideration 2: Property Condition
Assess the property’s age and current condition to estimate ongoing maintenance needs and potential renovation costs.
You must factor in the cost of upgrades or repairs to meet market expectations and enhance rental appeal. Should you require assistance, consult with a contractor and/or home inspector for professional guidance.
This careful evaluation helps you forecast long-term profitability and maintain a competitive edge in the local rental market.
Consideration 3: Market Rent Rates
Investigate local rent rates to gauge the property’s earning potential. From there, compare these rates with similar properties in the area to calculate competitive pricing.
Understanding market trends ensures your rent aligns with tenant expectations while maximizing your income. Regularly monitoring these rates helps adapt to market changes and sustain profitability over the long term.
Tip: Our rental property calculator comes in handy here.
Consideration 4: Legal and Zoning Regulations
Don’t assume that you know the legal and zoning regulations in the area you’re buying. Instead, you must do two things:
- Verify that the property complies with local zoning laws.
- Understand landlord-tenant laws, including any rent control measures.
Compliance with all regulations is crucial to avoid legal complications and ensure smooth operation of your rental property.
Consideration 5: Tenant Demand
Without research into tenant demand, you may believe that you’ve found the perfect rental property. However, additional research is always needed to ensure that tenant demand is there (and is likely to remain).
High-demand areas often yield better rental rates and lower vacancy periods, contributing to a more stable rental income. Conversely, low-demand areas are hypercompetitive and have high vacancy rates.
Consideration 6: Financing and Expenses
Examine financing options and calculate total expenses, including your mortgage, taxes, insurance, and maintenance costs. While you may not have exact numbers, depending on where you are in the buying process, accurate estimates are a must. With these numbers in hand, you can better choose a financing plan that aligns with your investment goals and cash flow requirements.
During ownership of the property, regular financial reviews help you effectively manage costs and maximize return on investment. For example, you may find that refinancing your property allows you to save money on interest. Or perhaps a home equity loan positions you to purchase another property.
Consideration 7: Future Value
One of the primary benefits of real estate investing is the potential for appreciation. While there’s no guarantee of this, history shows that there’s a good chance your property will gain value over the years.
When buying, consider the property’s potential for appreciation based on past market performance. Do the following:
- Analyze market trends and future development plans in the area that could enhance property value.
- Evaluate economic stability to determine the growth prospects of the region.
- Monitor housing market indicators such as supply and demand and foreclosure rates.
Your goal is to generate a positive return on investment (ROI) month after month as a landlord, while also owning a property that appreciates. This will make your investment well worth the money.
These are seven of the most important considerations when buying a rental property. While other details will come to light along the way, an early focus on these will point you in the right direction.
Are you ready to take the next step? Before beginning your search for the perfect property, read our eight-step guide. It provides even more information on how to make an informed, confident investment.
Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.