Investing in rental property proves an excellent way to create a residual income stream month after month, but its value hinges on keeping it leased out to quality tenants. The most gorgeous apartment in the world can profit less than a fixer-upper if keeping it rented out proves difficult. Then again, you don’t want to have to turn around and reinvest all your profits into making costly repairs.
When selecting an investment property, make like the tortoise and not the hare. Sure, it’s tempting to think of kicking back or switching to a part-time work schedule once the money starts rolling in. To maximize your profits, though, you need to evaluate a neighborhood’s rental potential before jumping into a market.
1. Start by Doing a Drive-By
Once you’ve determined your price range, use the weekend to do a drive-by of prospective properties. When scoping them out, pay attention to the following details:
- Are homes well-maintained or shabby? To attract quality tenants, you should invest in neighborhoods where homes show pride of ownership. Areas plagued with cars up on blocks in front lawns, landscaping overrun with weeds, and homes featuring cracked and peeling paint indicate a neighborhood with minimal draw. While this may not automatically disqualify a property, the maintenance or lack thereof of places surrounding it will impact resale value should the time come to walk away from the investment.
- What’s going up in the area? Is the city building a new freeway close to the front lawn of the property? If so, tenants may hesitate to apply or even break their lease if the noise grows too overwhelming.
- Would you park there overnight? If you wouldn’t feel safe in a certain neighborhood once the street lights come on, how can you expect your tenants to do so?
2. Evaluate Local Schools
If you’re renting single family homes or often work with families, this is important. One of the biggest considerations tenants with children keep in mind is the quality of nearby schools. All parents want their children to have the best education possible. If you’re considering investing in an area known for poor public schools, keep in mind that you’ll likely have more success finding tenants without young children.
3. Consider the Job Market
Just as schools matter to tenants with little ones, the job market matters to adults in the workforce. While it’s true some rural areas may appeal to older, retired residents, many people in this demographic own their own homes.
Strive to locate properties in areas of high job growth. This need not mean investing only in urban areas. Many up-and-coming small towns or growing secondary cities exist within easy commuting distance of major metro areas or enjoy thriving growth in their own right.
4. Research Rents to Balance Risk and Reward
When investing in property, you can go the safe, “blue chip” route or you can take a greater risk in hopes of a bigger return. Landlords who cherish peace of mind more than rapid gains should invest in properties needing few if any repairs in well-maintained neighborhoods.
Those who don’t mind rolling up their sleeves can go for a fixer-upper in a troubled area in hopes of reaping higher returns. As long as the property meets code, you can rent it out while continuing to make upgrades and eventually flip it — you can even find a handy tenant willing to help out with labor for a break on rent.
5. Protect Your Investment
Finally, keep in mind that as the property manager or owner, damages from acts of God and natural disasters fall on your shoulders. While it’s a good idea to require tenants to purchase their own renters’ insurance, this covers their personal property, not your home. Those who buy rentals in flood zones, for example, need to invest in separate insurance to cover that possibility, as most homeowners’ policies do not.
Making the Right Investment Decision
Selecting a rental unit shares much in common with investing in the stock market. The difference is you have a physical asset you need to maintain. By choosing a property falling within your risk comfort zone, you can maximize earnings and achieve financial freedom.
Holly Welles is a real estate writer who covers property management and investing advice for publishers across the web. She also runs her own blog, The Estate Update, where she publishes market trends and tips.
Kathleen Richards, is the owner of LandlordSource and The Property Management Coach. With her 13 years as a broker/owner of a property management company she speaks from experience. Kathleen authored, Property Management A-Z and teaches regularly at
community colleges and conferences on property management topics. She is active in her field and holds professional designations as Master Property Manager (MPM®) and Residential Management Professional (RMP®) and her company held the coveted, Certified Residential Management Company (CRMC®) designation from NARPM®. She is currently a National Instructor for NARPM® and is honored to be sharing best practices with other NARPM® professionals. Kathleen has served at the local and state level on the boards for NARPM® (National Association of Residential Property Managers).
Disclaimer: LandlordSource does not represent the article content in this newsletter as legal advice. It is shared information only and up to the reader to use this information responsibly, seeking legal advice as necessary to their business.