Top 10 Tips for Purchasing a Rental Property

Purchasing a rental home can be a daunting task.  Doing research up front can help you avoid some of the pitfalls of owning an investment home.  Here are the top 10 tips to help you make an informed decision and find the most profitable home with the best chances for long term appreciation.

  1. Location, Location, Location: The quality of the neighborhood where you purchase will determine the type of tenants you attract and how easy you will fill vacancies. For example, purchasing near a college will likely attract students and your vacancy rate will be higher due to the cyclical need for housing.  It is a good idea to drive through the neighborhood in the evening or on weekends when more people are likely to be home.  It will help you determine if the neighbors will help or detract from you keeping your home rented.  Things to look out for are the backyard mechanic or loud music blaring.  Chances are, if you would not want to live there, your tenants won’t either.
  2. Schools: Researching school ratings will also help you determine the quality of a neighborhood. Your tenants may already have children or plan to have children in the near future.  Owning a home in a desirable school district will help you attract more tenants and more than likely gain you a higher rental amount as well as helping increase your property value.
  3. Condition of the Home: Buy a home that you would want to live in.  For example, good floor plans, upgraded kitchens and a nicely maintained yard will give you an edge over other rental properties you may be up against.
  4. Surrounding Amenities: Check the surrounding area for local parks, shopping, gyms, public transit and anything else that may be considered a plus for potential renters.
  5. Property Taxes: Make sure you factor in property taxes before purchasing a home. Higher property taxes may not be a bad thing as long as the home will get higher rent to offset the cost.  Quality neighborhoods will normally have higher tax rates.
  6. Insurance Rates: Get insurance quotes before purchasing your home.  Being in a flood or earthquake zone can require higher amounts of coverage and policies will be more expensive.  This will eat way at your potential income and a natural disaster would require down time while you re-build.
  7. Job Market: Areas that have higher demands for labor will attract more potential tenants.  Watch for areas that have a major company moving in or check the U.S. Bureau of Labor Statistics at https://www.bls.gov/ to scope out areas prior to purchasing.
  8. Number of Available Listings: If the area is flooded with rental and sales listings you may want to consider purchasing elsewhere.  It is the simple rule of supply and demand.  An overabundance of supply will drive rental and sales prices down.
  9. Average Rent: Research recently leased homes and what is currently available for rent.  Make sure the rent will be enough to cover your expenses.  Make sure you project 5 years down the road.  Factor in average increases in property taxes and insurance rates.  What you may be able to afford now may put you at risk down the road.
  10. Surrounding Development: If there are open areas surrounding the home, make sure you research zoning and potential projects going in.  An undesirable project (for example a night club or trash recycling plant) can impact the value of your home and rental amount negatively.

Hiring an agent to help you with your home buying process is a good idea, as they usually know neighborhoods better and can give you valuable information, but do not rely on them solely to make your decision for you.  Make sure you carefully consider your options before signing on the dotted line.