Factors to Evaluate When Searching for a Profitable Rental Property

A rental property can make you good money, but only if you identify a profitable property from the beginning. For example, a profitable property has adequate tenants and doesn't cost much to maintain or own. Below are some specific factors to consider when shopping for such a property.

Attractiveness to Potential Tenants

You can only make money from a rental property if you have tenants. The best way to attract tenants is to give them an attractive property. Therefore, you should know what tenants like in your neighborhood of interest and get a rental property with the relevant features. For example, most tenants want:

• Low crime rates
• Good employment prospects
• Good school districts
• Useful amenities, such as swimming pools, parks, and fitness centers

Some of these features, like low crime rates, are out of your hand. But you can endeavor to improve features of the property, such as curb appeal, after purchase.

Average Rents

You must price your units within the average rents in the area. Compare your property with similar properties in the area to determine the average rent you can charge. Ensure that the comparisons:

• Have comparable square footage
• Are within the same neighborhood
• Have comparable amenities

You can use the average rent to calculate projected gross income for different occupancies.

Rental Vacancies and Turnover Rates

The number of tenants your property is likely to have at any time will affect your cash flow. You can approximate this number by looking at the vacancy rates in the area. For example, you should suspect high vacancies or turnover rates if neighborhood properties are always advertising properties for rent.

Property Taxes

A rental property can only be profitable if it makes more money than you spend to own the property. Property tax is one of the expenses you will have to pay, so you should understand it well. Note that property taxes vary by the area and the property type, size, and age.

Determine the applicable property taxes and the potential for changes (especially changes upwards) in the future. For example, the tax rate might be due for an evaluation if the municipality hasn't reviewed it for a long time.

Property Condition

The property's condition will also affect its cost of ownership. And don't forget that you must maintain the property to keep or attract tenants. You might also need to fix one-off damages. Expect to spend money:

• Caring for the landscaping
• Fixing broken fixtures
• Keeping the roof clean
• Fixing damaged structures, such as roof leaks

Despite the necessity of these expenses, these costs may be low if the property:

• Is relatively new
• Hasn't suffered damage (such as wind damage) in the recent past; or if it has, then then the owner affected adequate repairs
• Is in good condition because of adequate maintenance

An evaluation of the property, for example, via a property inspection, can help you know its condition.

Planned Developments and Growth Potential

You should also consider the future prospects of the neighborhood. For example, future developments, especially in the real estate industry, can affect:

• Your future building's attractiveness
• The future availability of tenants in the area
• Changes in property taxes

Consider a case where a big employer is planning to move to your neighborhood of interest. That is a sign of the neighborhood's growth potential, which increases the potential profitability of the area's properties.