Today more than ever ordinary people are looking to invest in residential real estate as a way to build their wealth and hopefully secure their future. It is a known fact that owning a rental property is a great way to diversify your assets and create a steady stream of incoming cash. The problem is, these “ordinary” people often aren’t realistic about what owning a rental property actually entails and have no idea what constitutes a good investment when they set out to purchase a property to rent.
In order to avoid these common investment mistakes let’s take a look at the top ten features of a good rental property investment.
10 Important Features of a Profitable Rental Property
1. Does It Make Financial Sense?
The entire point of owning a rental property is to generate income off of it. Here are some important questions to answer about your potential investment to ensure you are making a financially sound decision:
The One Percent Rule
Can you rent the property monthly for one percent of its purchase price? In other words, if the annual gross rent (before any expenses such as taxes, maintenance, and insurance) equals at least twelve percent of the purchase price of the property, it is worth considering. This is generally a good starting point for a rental property return and should be the bare minimum you would be willing to accept in terms of monthly rent.
The Cap Rate
Is the cap rate acceptable? Take a look at your monthly rent, subtract the estimated monthly expenses (such as taxes, maintenance, and insurance) and divide this total by the purchase price. This final figure is considered your cap rate, otherwise known as the approximate rate of return should you buy the property in cash. The percentage of return your potential property yields after this calculation will give you an idea if it is worth purchasing or not.
If you purchase an income property in Prince George’s County you will have no problem getting a high rate of return on your property because right now there is a high demand for quality homes by renters.
2. Location, Location, Location
As one of the most important aspects to a good investment, it is crucial you research the location of your property before investing in it. A good location, one near schools, shopping centers, local transportation, and more can make up for some shortcomings the property may have. Choose wisely because locations do not change and renters often make location a priority when selecting a home to rent.
3. The Importance of Education
Tenants that have children will surely be on the lookout for good schools in the area they are living. The property you choose to invest in should be surrounded by high performing schools of all levels so your tenants will feel confident their children are getting the best education possible. One possible choice for a rental property might be in the city of Bowie. Boasting a small-town feel with the amenities of a city, Bowie also happens to be home to Bowie State University, a college providing high-quality education and a comprehensive learning environment for college students.
4. Crime Doesn’t Pay (Your Rent)
It may seem obvious that no one wants to rent a home in a crime-ridden area; however locations with high crime rates are not always so obvious. By conducting a little investigation into the specific area in which you would like to invest, you will be able to tell whether the home you are looking to purchase is in a safe neighborhood. You can bet your potential tenants will check before signing the lease agreement, so stay ahead of the game and don’t invest somewhere unsafe.
5. Jobs Do Pay (Your Rent)
Nearby employment opportunities are an incentive for people to rent homes in a specific area. See how a particular area rates by going to the U.S Bureau of Labor Statistics. The key is to find a location with a low unemployment rate.
The truth is, when a rental property is located near an employment hub, tenants are more likely to pay their rent on time, stay long-term, and make more money for you in the long run. In addition, reliable employment will result in less job transfers for your tenants, hopefully lowering the chance they may break your lease agreement early.
For a tenant, renting a home is not just about the actual physical property. Although there are plenty of top notch amenities tenants look for in a rental home, there are external amenities that are important too.
Things to do and places to go in the surrounding area will add value to your tenants’ daily lives. For instance, investing in an area such as Laurel is a smart move because it’s fun to live there. There are plenty of amenities for your tenants to enjoy such as theaters, an art gallery, several state parks, and three annual festivals. Make sure to double check what your tenants will have access to when you plan to invest in a rental property.
7. Listing/Vacancy Rates
If there are an unusual amount of listings and/or vacancies near the property you are thinking of investing in, take a closer look as to why. Vacant homes surrounding the home you invest in can devalue the property and harm your bottom line. Investigate whether the vacancies are due to seasonal rent cycles or whether they are an indication of a poorly located property.
8. Average Rent of Nearby Properties
The way to a profit when investing in a rental property will come in the form of a monthly rental payment from your tenant. Evaluating the going rental rates of similar properties will help confirm your choice to invest in a particular property. Going back to the above-mentioned concept that the investment must make financial sense, it is important that when you purchase a property you do not overpay and that when you lease the property out you do not undercharge.
9. Is It Rent-Ready?
Investing in a fixer-upper can have many downsides when it comes to renting out your property. Ideally you should invest in a property and have a short turnaround when it comes to renting the property. If you invest in a property that is not rent-ready and needs several repairs, you could end up eating into your annual profit before renting the property to its first tenant.
However, it is not a complete bust if you come across a property that seems perfect in all aspects minus some minor repairs. Just keep in mind that if you must invest in a property that needs some work before it is ready for occupancy, try to make those repairs quickly, efficiently, and on a budget.
10. Protection Against Natural Disasters
Some places in the United States rarely have to consider natural disasters of any kind. However, if you are looking to invest in an area such as Takoma Park it might be a good idea to get an idea of what may be in store for you in the future regarding nasty weather.
As the owner of a rental property you will likely insure your home against any type of physical damage to the building structure. While this expense does have a negative effect on your annual investment profit, not preparing for commonplace natural disasters will do much more harm to your investment should say, a tornado tear your house to the ground, or a hurricane flood your home causing significant damage.
Investing in a rental property in Prince George’s County can be a lucrative move if done with proper planning and an understanding of what makes a good investment. As a landlord it is your responsibility to choose wisely and invest in a property that will make you a profit each year. However, once the process of investing is done, consider using your favorite Maryland property management company to take care of the rest. Finding the property that will work for you and your potential tenants is a lot of work, but managing your property doesn’t have to be. Let the best take over and give you back your free time and peace of mind that all is being handled properly, in compliance with local and state laws, and at a profitable rate of return.