The idea can be daunting for a first-time investor. Real estate is a tough business and the field is peppered with land mines that can obliterate your returns. Here are the most important things to consider while shopping for an income property.
You may want a real estate agent to help you complete the purchase, but you should start searching for a property on your own. An agent can bring unnecessary pressure on you to buy before you have found an investment that suits you best. And finding that investment is going to take some sleuthing skills and some shoe leather.
Your range will be limited by whether you intend to actively manage the property or hire someone else to manage it. If you intend to actively manage, you don’t want a property that’s too far from where you live. If you are going to get a property management company to look after it, proximity is less of an issue.
Let’s take a look at the top 10 things you should consider when searching for the right rental property
1. Neighborhood. The neighborhood in which you buy will determine the types of tenants you attract and your vacancy rate. If you buy near a university, the chances are that students will dominate your pool of potential tenants and you will struggle to fill vacancies every summer. Also be aware that some towns attempt to discourage rental conversions by imposing exorbitant permit fees and piling on the red tape.
2. Property Taxes. Property taxes are likely to vary widely across your target area and you want to be aware of how much you will be losing to them. High property taxes are not always a bad thing in a great neighborhood that attracts long-term tenants, but there are lousy places with high taxes, too. The municipality’s assessment office will have all the tax information on file, or you can talk to homeowners in the community. It is also wise to find out if property tax increases are likely in the near future. A town in financial distress may hike taxes far beyond what a landlord can realistically charge in rent.
3. Schools. If you’re dealing with family-sized homes, consider the quality of the local schools. Although you will be mostly concerned about the monthly cash flow, the overall value of your rental property comes into play when you eventually sell it. If there are no good schools nearby it can affect the value of your investment.
4. Crime. No one wants to live next door to a hot spot for criminal activity. The local police or public library should have accurate crime statistics for neighborhoods. Check the rates for vandalism, serious crimes, and petty crimes, and note if criminal activity is moving up or down. You might also want to ask about the frequency of a police presence in your neighborhood.
5. Job Market. Locations with growing employment opportunities attract more tenants. To find out how an area rates for job availability, check with the U.S. Bureau of Labor Statistics or go to a local library. If you see an announcement about a major company moving to the area, you can be sure that workers in search of a place to live will flock to the area. This may cause house prices to go up or down, depending on the type of business moving in. You can assume that if you would like that company in your backyard, your renters will as well.
6. Amenities. Tour the neighborhood and check out the parks, restaurants, gyms, movie theaters, public transportation links, and all the other perks that attract renters. City Hall may have promotional literature that will give you an idea of where the best blend of public amenities and private property can be found.
7. Future Development. The municipal planning department will have information on new development that is coming or has been zoned into the area. If there is a lot of construction going on, it is probably a good growth area. Watch out for new developments that could hurt the price of surrounding properties. Additional new housing could also compete with your property.
8. Number of Listings and Vacancies. If a neighborhood has an unusually high number of listings, it can either signal a seasonal cycle or a neighborhood in decline. You need to find out which it is. In either case, high vacancy rates force landlords to lower rents to attract tenants. Low vacancy rates allow landlords to raise rental rates.
9. Average Rents. Rental income will be your bread-and-butter, so you need to know what the average rent in the area is. Make sure any property you consider will bear enough rent to cover your mortgage payment, taxes, and other expenses. Research the area well enough to gauge where it will be headed in the next five years. If you can afford the area now but taxes are expected to increase, an affordable property today may mean bankruptcy later.
10. Natural Disasters. Insurance is another expense that you will have to subtract from your returns, so you need to know just how much it’s going to cost you. If an area is prone to earthquakes or flooding, coverage costs can eat away at your rental income.
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