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What makes a good rental property?
A simplistic answer to this question when investing in rental property would be, one that makes money. A better answer would be, a good rental property investment is one that makes money easily. And an even better answer to the question, is rental property a good investment, would be, yes, if it’s one that makes a better return on your investment than any other investment you have – and does so easily. So, let’s explore the real meaning behind each answer.
Are rental properties a good investment?
Unless you’re specifically looking for any rental property to throw off losses to offset gains from other income streams – be they earned income or dividends – most property investors will look to find rental properties that produce positive cash flows. In a basic cash flow analysis, you’ll want to add up your gross rent income the property throws off, then deduct all your expenses for the building. These include carrying costs (eg., your mortgage, taxes and insurance), as well as maintenance costs (heating, electricity, repairs and property maintenance). Don’t forget to include an amount for vacancy and emergency repairs.
If you are going to manage the property yourself, you won’t have to pay a property management company for their services (usually 10-15% of your rent roll). However, make sure you’ve done a careful analysis of your own temperament and aptitude with this position. It certainly is not for everyone… How good will you be with finding excellent tenants? And collecting monthly rents? How about handling repair calls, especially emergency calls at late hours? You’ll also need to make regular inspections of your building to ensure proper maintenance is being done properly. (Is your lawn care guy mowing the lawn regularly? Does your snow plow guy show up on time and do a good job of snow clearing? You get the idea…) If you find that your potential rental acquisition will produce, at least on paper, a positive cash flow – then it may be for you – at the right price of course.
Return on investment
The next question, will your property throw off a better return on investment (ROI) than any other investment you own, is based on your understanding of what target ROI you will require to make the purchase of any rental property worthwhile. Is a 5% ROI going to be enough for you? Some property investors will say yes, other’s no. Only you can decide….And it’s a decision to be made for every potential rental property acquisition. As you purchase a property, and accumulate a history with it, you’ll be able to determine if the property is underperforming or doing well. You should make periodic adjustments to reflect this. Sell off underperformers when they are not doing well for an extended period of time.
Finding a good location
Finally, the last question to be answered, can you maintain your rental property easily, will probably be based a great deal on location. An investment property in a high crime area will require a lot more work, due to the type of tenant you’ll be able to attract. The poorer the tenant stock, the more work you’re going to have. Bad tenants don’t pay on time…some, not at all. Endless chasing them for rent, or worse, trying to evict them – is time consuming and costly. In addition bad tenants tend to not take care of your unit. This means more repair costs over time. So maintenance and emergency calls will increase. So if you can purchase rental properties in better areas, they may cost more, but you should be able to charge more in rent, and you will obtain better tenants. And better tenants will make your life much easier for you in the long haul.
photos courtesy of anchorloans.com, houstonmortgagetexas.com, ortak.com, stiles-law.com, lawofficewalterjennings.com