As you start your search for your next investment property, you may be wondering what exactly it is that you’re looking for. How can you tell if a property is going to make you money? How can you assess the risk and make an informed and confident decision? Many new investors are surprised to learn that many of the things that make a profitable rental property aren’t physical features of the property at all.
Below is a checklist of the top five features of a profitable rental property. As you vet properties, ask yourself how the property measures up in these five categories before making a final decision.
One of the most important things to look for when considering a rental property is the neighborhood. For a property to make money, it has to be in a location in which people want to live. Some things to consider when analyzing the neighborhood include:
- School zones
- Crime rate
- Traffic patterns
- Local employment rate
- Median home values
- Median income
Properties in neighborhoods with above-average home values, highly desirable schools, and low crime will be popular for renters and will generate higher rental yields. You may find a great property with a lot of potential at a low price, but if it’s located in an unfavorable neighborhood it will be hard to find qualified tenants. It may take more time to generate interest, which means more time on the market, longer voids, and less money in your pocket.
Drive through the neighborhood at different times during the day, over the weekend, and during rush hour. Talk to the neighbours and get an idea for the sense of community in the area. Is it mostly University students? Busy professionals? Retirees? Young families? Knowing this will help you market your property to the right tenant.
Average Rental Price
A comparative market analysis will help you determine how your property measures up against those in the area. This will give you an idea of the average property values in the area, average rental prices, and average vacancy rates. Knowing this, you can determine if the property you are interested in will generate enough income to cover expenses and produce a profit.
Different rental markets will produce different rental yields, but as a general rule, average property prices around the UK area round £274,000 and have an average rental price of £9,708 per annum. This means the average rental yield is 3.53%. Anything over this 3.53% can be considered as over-performing. Rental yields are dependent on supply and demand, the quality of the location, and average void periods.
Smart investors don’t make decisions solely based on the current condition of the property or the neighborhood. They ask questions about future development, new roads, and plans for future infrastructure. How will plans for future development impact the home values in the area? Will these changes bring more people to the area or cause them to move? Knowing this information will help you make a decision based on long term growth. It can also help you invest in an area that is up and coming and will appreciate quickly.
Along with the condition of the neighborhood, it is important to consider the property’s centrality. This is determined by how far away the property is from local amenities such as schools, downtown areas, hospitals, restaurants, retail shops, and the city center. Is it close to public transportation? How is traffic during peak times during the day? Is it close to everyday conveniences? A profitable rental property will be central to the amenities that are important to the community.
It’s also important to remember that land is a finite resource, so areas that are already highly developed (bigger cities) and are limited on growth options, tend to be more expensive (and generate higher rental yields) than those in rural, still-developing areas.
Updated Living Spaces
The location and the local rental market play a significant part in whether or not a property will be a profitable investment, but there are certain physical characteristics of a property that help improve its value and maximize ROI. Updated living spaces, more specifically kitchens and bathrooms, can dramatically improve a property’s value and profitability. Modern tenants will be looking for high-end appliances and updated finishes and features. A kitchen or bathroom renovation could increase the amount you can charge for rent.
Walking into a potential investment property with a predetermined checklist will help you make better business decisions. Knowing exactly what you’re looking for and what features will make or break the deal will make it easier to make logical decisions versus emotional ones. A profitable rental property will be in a highly desirable location, be central to everyday amenities, and have the features and amenities modern tenants are looking for. There’s no such thing as a perfect property, but you can increase the chances for profitability if you go in knowing exactly what you do (and don’t) want.