Key Factors To Consider When Buying Rental Properties
Investing in rental properties holds enormous promise for those who are willing to spend significant time researching local markets
. Each market is unique, and offers a host of attributes that must be taken into account. There are many potential traps that can ensnare the unwary.
Most new investors start with a single residential property, and slowly increase their portfolio's holdings over time. Doing this successfully requires insight, patience, and the right blend of market forces. The current real estate market has created a boon for savvy investors, but there remain obstacles to staying in the black. Below, we'll provide a checklist of the most important elements to research before buying your next rental property.
Property Tax Liability
Your cash flow from each rental property will be dependent on the money that comes in via rent, and the money that goes out for maintenance, repairs, and property taxes. Many first-time investors research costs associated with maintenance and repairs. They neglect taxes.
Find out what the property tax rate is for the community in which you're thinking about investing. The rate can vary within a wide band. For example, according to the Tax Foundation, the average property tax in Illinois in 2009 was 1.57% of the property's value. In Louisiana, it was only 0.14%. Keep in mind a high rate does not necessarily mean a poor investment. It is one of many factors to consider.
Employment Opportunities (Current And Future)
If there are plenty of jobs, there will be plenty of tenants. When an area's unemployment rate rises, however, there tends to be an attrition of tenants. For this reason, make sure the city in which you're investing has a healthy job outlook. You can find city-specific employment rates online for most cities throughout the U.S. But you'll also want to research whether the current job climate will change in the near future.
For example, is there new development planned that will improve the local job outlook? Is a major employer in the area planning to relocate, taking jobs with them? These factors will play an important role in the future stability of your tenant base.
Quality Of Local Schools
School quality continues to be a reliable barometer regarding which direction property values in the community are heading. If local schools are suffering in state and national rankings, property values - and thus rent levels - will likely decline. On the other hand, if schools in the area enjoy a stellar reputation, the opposite effect will occur.
At first glance, you may be tempted to neglect property values since your cash flow will be determined by incoming rent payments and outflows. Keep in mind, however, you'll likely sell the property in the future. A drop in its value might place the investment in the red even if your cash flow is positive.
Prevailing Rent Level
An area's rent level is critical because rent payments represent the only source of positive cash flow your rental property will generate. Consequently, you'll need to determine whether the rent you'll be able to collect will produce sufficient cash to pay bills associated with the property (i.e. mortgage, property taxes, etc.). Remember to factor in a reasonable vacancy rate since you won't be able to collect rental income from vacant units.
State Of The Neighborhood
Before investing in an area, research its prospects, and the type of tenant you might attract. For example, suppose the rental property is located near a college. You'll likely attract tenants who turnover quickly, which means you'll cope with a high vacancy rate. Or, suppose the crime rate in the area is high. This can suppress property values and the location's average rent.
On the other hand, as mentioned earlier, new development projects may signal growth down the road. For example, a new utility, train station, or large employer breaking ground might indicate property values and rents are poised to rise.
Getting involved with rental properties is not for those who prefer to take a hands-off approach to real estate investing. If, however, you're willing to do a bit of research, this can be a reliable strategy for generating a healthy return.
by: Donald Massey
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