Part 1: The basics
When you first try locating rental properties, start searching in areas that are close to downtowns of communities – and therefore, close to transportation, shopping, schools and basically, civilization. Most renters want to be close to all these services, and you’ll want to appeal to as large a pool of renters as possible.
Economies of scale
When evaluating rental properties, keep in mind the economies of scale of having more units in one building. Thus a two-family house is better than a single family, a three-family better than a two-family, etc. This is simply because your fixed costs will typically be quite regular and close in expense whether you have a single family property or a four-family house. You still have (usually) one boiler for both, one electrical system, one plumbing system, etc. Likewise, the yard, driveway and walkways that you’ll need to maintain will also be about the same cost for any of these size houses. But the potential income is obviously greater with the more units in a building. In addition, the loss of any one tenant (and the possible vacancy for some period of time) in a four-family will not be as potentially devastating as with a single family house.
Optimum number of units
Also keep in mind that in terms of mortgage financing, rental properties that are five-family and above are considered commercial property. And commercial property is treated quite differently by lenders. One of the main differences is mortgages on commercial property tend to have more stringent qualifying rules associated with them. In addition, interest rates and repayment terms are also usually more costly and restrictive relative to standard residential (four family and under) type houses.
Choosing the location of rental property
Like the selection process for houses an investor would look for to fix up and sell, many of the same factors are involved in the decision process for multi-family houses. Like homeowners, the preponderance of tenants want to be close to neighborhood services – transportation, stores, schools, etc. In addition, tenants certainly care about the crime rate in a given area they’re looking in. So you’ll want to check with the local police to garner crime statistics for the towns you’re looking to purchase in. Obviously, safer neighborhoods will translate into higher house values, and therefore command more in purchase price, because their rents will also be commensurately higher.
Also, don’t underestimate the value of a good school system. The higher the objectively ranked school system where your prospective investment rental property is located, the higher the price it will command. More tenants will be looking in those school districts compared with lesser-rated school districts. You can check on objective ranking data by looking online for ELA test results for elementary schools in your area. You can also check high school rankings based on SAT scores for your area as well.
How far away is the property from where you live?
Another part of determining the best location for a rental property, is to ask yourself this question: how far am I willing to travel in the middle of the night when I get an emergency call from a tenant? You’ll certainly want to live close by your rental property, at least initially.
photos courtesy of members.virtualtourist.com, 1915mears.com, fostercityblog.com
- Watch out for gazumping in the rental sector (confused.com)