More people than ever are choosing to rent their homes. With 36.6% of households renting, that’s the highest it’s been since 1965.
So if you’ve been toying with the idea of investing in rentals, now is the time to do it!
But don’t jump into it lightly. While being a landlord isn’t a guarantee for big money, there are some things you can do to make sure you’re investing your money wisely.
Let’s look at 8 steps to know how to determine a good rental property for your portfolio.
1. Do Your Research
If you jump into the world of rental properties without knowing what you’re getting into, it could be a big financial mistake. Always do your research.
This involves talking to others. Whether they are real estate agents, other landlords, or even friends who have invested in rentals before. They can give you insight into the market and advice for your area of interest.
You can also take courses or read books on the subject.
Knowing as much as you can and treating your rental as a business will ensure you go into this with confidence and the proper knowledge to be successful at it.
2. Think About Your Ideal Renter
Do you know what type of renter you want to cater to? Young professionals, families, students, or older adults all have different preferences you need to be aware of.
Once you know your ideal renter, find a neighborhood that attracts them. And it’s best to pick a neighborhood you are familiar with, especially if you’re a first-time investor.
Things you want to consider in location is the schools, property taxes, crime rates, and amenities.
And find investment properties that fit the personality of the neighborhood. A rundown studio apartment in the middle of a hip, upscale neighborhood isn’t going to attract the type of tenant you’re likely after.
3. Figure out How Much You Can Borrow
Before you buy your rental property, you need to figure out what your borrowing position is. That will give you the jumping off point to determine what type of property you can afford and search for.
Talk to a lender. Found out about the different types of loans and interest rates. And make sure it would be a monthly payment you can easily afford and still make a profit on the property.
Getting yourself debt-free before investing can make getting a loan easier. It will also lessen your stress of making sure you have enough income coming in and cash on hand for any unforeseen expenses.
Having a healthy down payment is also a great idea. For investment properties, shoot for having at least 20%.
4. Get the Right Financing
There are lots of financing options to choose from when investing in property. Talking to a lender will help you sort out the best one for you.
You’ll want to do research to make sure the kind of property you want to rent out is eligible for financing. For example, time-shares and certain manufactured homes might have different requirements.
It’s always best to compare.
5. Know Your Operating Costs
Your mortgage isn’t the only cost you’ll have to deal with as a landlord. Other monthly costs will add to your expenses.
These costs include taxes, insurance, maintenance, any HOA fees, and if you’re paying any of the monthly utility bills.
And make sure you budget plenty for maintenance. Repairs can get expensive and they usually pop up when you least expect it. If you’re making a good profit on the property, many times that will cover any unforeseen costs, but don’t always count on it.
Knowing how much your monthly operating costs are will help you determine if you’ll be able to make a profit on a potential property.
6. Avoid Fixer-Uppers
While it’s tempting to find a fixer-upper and flip it into a rental property, it might not be the best option. You could quickly find yourself in a money pit and be in way over your head.
When you start renovating the core of a house, like the electrical, plumbing, and structure, costs can start to add up. Plus, those complicated features will likely need a professional to come in to do the work, only adding to the cost.
Cosmetic features are a bit easier, especially for first-time investors. Things like painting, tile work, and changing out fixtures are things you can do on your own to save money. And it usually doesn’t come with unforeseen surprises that core housing features can bring.
7. Set Your Rental Rate
Of course, you want to make a profit on your property. So, to make sure you invest in the right one, make sure you can get the rental rate you want.
Before you buy, research comparable rentals in the area. To do this, talk to property managers who supervise rentals in the neighborhood. Ask real estate agents or review rental advertisements for current rates.
If the going rental rates can cover your expenses plus leave a healthy profit, you’ll know it’s a good rental property to invest in.
But it’s also a good idea to make sure there isn’t a high vacancy rate in the area. If the neighborhood has over a 7% vacancy rate, it may mean you’ll have trouble finding a tenant.
8. Find Great Renters
Finding great renters is worth its weight in gold. Because when you invest in a rental property, you want tenants that value it as much as you do.
That’s why it’s important to take the time to vet potential renters. A thorough tenant screening will give you a glimpse into their background, which is a good indicator of what kind of tenants they’ll be.
Can they afford the monthly rent? Do they have a history of late payments? Have they taken care of rental properties in the past and stayed there for a good amount of time?
Answers to questions like that can give you peace of mind knowing you’re renting your property to someone you can trust and won’t cost you extra money.
Knowing How to Determine a Good Rental Property Will Set You up for Success
Playing the rental property game isn’t easy. But with these steps, you can set yourself on the right track. And know how to determine a good rental property when you see one!
Don’t let uninvited visitors ruin your rental property. Check out these 5 signs your rental home has mice.