How to Pick Profitable Properties
Is investing in rental properties profitable? Check out the following statistic: Last year, the average ROI on rental properties rose 8.5%. According to a study by idealista, the reason behind the growth is simple: higher demand. In a good economy, people tend to upgrade their rental experiences by leasing higher-quality properties. In a weak economy, those that balk at the commitment that comes with buying would prefer to limit their risk by renting. It’s a win-win for both renters and investors.
An optimistic investor could reason that, given the growth in the market, all properties are stable investments, right? Wrong. You have to be picky! Here’s why—and how.
Avoid Bad Investments: Choose the Right Location
In and around the Richmond area, the wrong location can quickly turn a treasure into a tragedy. Even if a property is need of substantial repair, over time, in a healthy area, that money can be recouped. However, if the property is located in a dying economic region, the value of the property as an income-generating asset will get dragged down to the grave with it. This is true for both commercial and residential investments: people rent in places that provide opportunities. Only select properties in areas experiencing an influx of upwardly mobile people. To narrow down your search, look out for the following:
- Average home prices should be increasing year-over-year a little faster than the national rate.
- Property taxes should be going up steadily following this growth.
- There should be obvious signs of ongoing infrastructure improvement projects.
- Medium-to-large companies should be moving to within commuting distance of the area.
If you don’t see any at least two of these four determiners, you should consider looking elsewhere.
Use Inspections to Identify "Toxic" Properties
If a property still looks like a great deal after you evaluate the location, be hyper-aware of hidden problems. Take some time to paint a big picture of how you will profit from this property. Think about whom you want to market it to, how it’s going to be used, for how long, and what issues could interfere with those plans. Be sure to tailor your questions according to the needs of the Richmond area. Then use this information to inform your list of things you want the inspector to seek.
For example, if you’re targeting young professionals looking for a home in Tuckahoe, your property should be relatively trouble-free for at least five years. Check the roof, the furnace, the water heater, the foundation, and even the water and sewage mains. Try to eliminate the possibility of big-ticket repairs. On the other hand, if you will likely be renting to short term tenants—like grad school students—you can get away with a slightly older roof. You could then use the rental income to help finance repairs and upgrades between tenants.
Operate in the "Rental Home Mindset"
Your mindset when buying a home as a rental investment should be opposite your mindset when purchasing a personal home. Perhaps the biggest mental shift has to occur as you choose the style of the house. What gives you butterflies in the belly might turn away a potential tenant. Invest in properties with malleable styles. It’s better for a home to have neutral tones than to get too creative with your own sense of fashion. What appeals to one renter may not appeal to another!
It’s important to also select homes with efficient HVAC systems. Because the tenant usually absorbs all of the heating and cooling costs, if you have an inefficient system, you can inadvertently push good people out. When you live in a home, you have the leeway to make decisions and sacrifices to keep the utility expenses down. If you’re the landlord, the tenants don’t have that flexibility; they have to deal with what you provide.
You also want to keep in mind that you don’t have to love the home; your tenants do! Buying a home for yourself is like home-owning courtship. Ultimately, you're deciding if you want to live there until “death do you part.” Renters view a property differently: the lack of a dining room or the need for an extra half bath may not be the deal-killers they would be for your family.
Add a Property Management Company to Your Team
Given enough time, you are going to find the right properties in which to invest. However, time is always of the essence! Hiring a property manager is a great way to save time, money, and the headaches that come with investing. They can help identify properties that fit your criteria. They can also delve into features of homes using filters that suit your needs as a landlord—many of which are not available via online real estate search engines.
Regardless of where you are in your journey as a landlord, a property management partner can support that journey. As you build your portfolio, a rental analysis can help pinpoint profitable opportunities in Tuckahoe. Mission Realty Property Management is here to help you create that portfolio! Let's get started with a FREE rental analysis!