5 Things to Look for in an Investment Property
What makes a property great for investment? These tips can start you on the path to success in the world of real estate investing.
Passive income, appreciation, stability, great returns, tax benefits—the arguments for investing in long-term, hold-to-rent real estate just make sense. Listen to them long enough, and you really start to wonder, “Why am I not in on this?”
Listen a little longer, and that question becomes, “All right, how do I get in on this?”
Not all hold-to-rent properties are created equal. If you’re on the hunt for a long-term real estate investment, you need to understand what you’re looking for, and you need to know what your prospective renters are looking for, as well.
Here are the five things that should be at the top of your checklist.
1. An Enticing Location
The reason you hear everyone going on about “location, location, location” is because it really is that important. An appealing location is key to getting a great return on your investment. It determines the amount of rent you bring in, the quality of your renter, and the vacancy rate you’re likely to experience.
A neighborhood with access to plenty of amenities is your best bet when you’re looking to hold-and-rent. Good schools, a thriving job market, public transportation, parks, restaurants, shopping centers, post offices, medical centers, libraries, and entertainment venues are just a few of the things that will make your rental appealing to prospective tenants.
The safety of the neighborhood factors into the location’s appeal, too. Do some research into crime trends before you invest in a property. Start by contacting the local law enforcement agency to find out about vandalism in the area, as well as petty and serious crimes. You’ll also want to ask whether those numbers are going up or down to give yourself an idea of the long-term picture.
2. Numbers that Make Sense
If you’re new to real estate, you might be tempted to choose your investment property based on emotion. That’s a common trap, and it’s one that you really don’t want to fall into. Remember that you’re not going to be living in this rental yourself, so your personal tastes don’t matter.
What does matter are the numbers.
Make a financial strategy before you buy, and don’t forget that you’re covering more than just the mortgage. You also have to factor operating costs and property taxes into the equation, as well as the average vacancy rate.
When you’re working on the numbers, keep in mind that just because rent prices are higher in a certain area doesn’t mean you’re going to come away with positive cash flow at the end of the day. Take the time to calculate what the real payoff will be against your initial investment. Much of the time, median-priced investments with reasonable rent yield better long-term returns than high-profile rentals.
3. Low Maintenance
Some investment properties take more time to maintain than others, like vacation rentals and student rentals. Properties in low-quality areas that aren’t in good shape also have higher turnover rates and will require more work on your part.
The most low-maintenance properties are the ones that attract stable, long-term renters. These probably won’t be the flashiest investments on the market, and that’s okay. You’re going for strong and steady, not a flash in the pan.
If you’re going to manage the property yourself (instead of hiring a property manager), then location also comes into play when you’re looking at maintenance. Make sure your property is reasonably close to your home base. Otherwise, driving out there—or worse, flying out-to deal with every little thing that comes up will become a big headache, fast.
4. The Potential to Appreciate
A smart investment is a rental property that appreciates in value. For you as an investor, appreciation works on two levels: the first is when you buy the property, and the second is when you sell it.
When you buy, look at the appreciation potential that you can get from doing a few cosmetic updates on the place. How much more will you be able to charge for rent after the walls have a new coat of paint, compared to what it would be worth as-is? You stand to save money on your initial investment if you’re willing to put a little work into the property after you buy it.
The other thing to look at is how much the property will be worth when you sell it down the road. All land is going to appreciate a little bit over time, but you want an investment that will increase in value more than the rest. It goes without saying that some areas are more up and coming than others. However, you can take it even further than that.
Look at the appeal of the specific location of the property within the larger neighborhood (for example, being on a cul-de-sac increases value). You can also check with city hall to find out about plans to build new amenities, which will boost future property values in the area.
5. Normal, Through and Through
Long-term, hold-to-rent real estate can be a great and stable investment—when you’re smart about it. When you’re not smart about it, you can find yourself in a high-risk situation fast. In the case of long-term rentals, “smart” means “normal.” You’re not looking to become the next HGTV phenomenon. You want a steady, low-risk investment.
What “normal” means is that you’re looking for something practical, in decent shape, in a place where people want to live. An example of “practical”: A three-bedroom, two-bath house with a normal layout, located near schools and major employment centers. Impractical? The beautifully updated Victorian that has an outhouse in the backyard.
You also want to know the basics about who you’re renting to, so that you can meet that target group’s basic standards. For example, if you’re renting to a younger crowd, you want to invest in a property with units that have an open layout. If you’re targeting a retirement community, you want to find one that doesn’t have a lot of stairs.
In hold-to-rent real estate investing, the bottom line is this: Stick to the basics. They may not be exciting, but they’ll lead you to long-term success.
This information was originally published on Auction.com, the nation’s leading online real estate marketplace. Kristine Serio is a writer and editor with Author Bridge Media specializing in business and real estate. Her real estate roots stretch back to her grandfather, who launched a profitable second career as a real estate investor during the 1950s. Kristine’s authors and entrepreneurs have been featured in The New York Times, O: the Oprah Magazine, and the San Diego Union Tribune.