How to Find a Good Rental Property That Pays Off
Real estate can be a great way to build wealth. It can not only provide benefits now but — done well — it can positively impact generations to come.
There are never any guarantees, of course, but there are ways to improve your chances of success. The most impactful way is to start off with the right property. The following information can give you insight into how to find a good rental property that puts money back into your pockets.
Let's start at the very beginning: What do you want? You may be thinking here, “I just want to make money.” Yes, that is the ultimate goal, but you have to think a little farther than that. How do you want to make that money? Your answer is most likely, "Real estate. Isn't that why I'm on this article?"
Yes, that is certainly why you are reading this – and we appreciate you visiting us for the help you need! However, we need to go a few steps further in order to reach your goal.
How, precisely, do you want to make money off of real estate? You have so many options available to you that you need to choose between to formalize a plan before you get started. Let's begin with discussing two different methods one might mean when they say they want to invest in rental property.
REITs
REITs – or Real Estate Investment Trusts — is a very hands-off way to make money on rental properties. They involve a financial investment through a company that owns rental properties. These are typically those such as malls, hotels, apartments, luxury resorts, and more.
The appeal behind REITs is that they do not take a significant investment from each investor. Instead, some only require a few hundred dollars to get started. The low initial cost makes it much more viable for the average person to take part while making decent — sometimes a lot of — money.
Additionally, REITs provide the convenience of someone else handling the ongoing operations. You need only to invest the cash to reap the benefits.
How to Find a Good Rental Property With REITs
REITs are an easy way to break into the real estate industry, and they can provide really high profits. Of course, nothing is guaranteed. There is always a chance of failure with anything. Therefore, it can benefit you well to follow a few tips to choose the best.
#1 Check the company and the REIT's track record
They say the best indicator of future behavior is past behavior. Granted, things and people can always change. However, when it comes to deciding where to put your money, it's best to go with something that has a pretty good history.
#2 Avoid real estate types that typically a lot suffer during economic issues
You might think that investing in a luxury resort is a good idea due to the amount people are willing to spend there. You are right, at least as long as the economy is doing pretty good. However, recessions can wreak havoc on resorts' business, and it can often take time to recover.
Malls and shopping centers can also be impacted, but they often recover more quickly. Any REITs connected to these types of properties can be risky, so it will require some research. Determine how bad that business is impacted during hard times and how quickly it bounces back. If it's too much, walk away.
#3 Aim for publicly traded equity REITs
Typically, these come with less risk as there is more liquidity, more transparency of fees, and other benefits. Publicly traded REITs also come as equity and mortgage options. Equity REITs are related directly to commercial properties, while mortgage REITs are related to – well – mortgages. Equity REITs are known to be safer, and mortgage REITs usually provide high yields but more risk.
Take Care of Your Financial Future.
Landlording
Being a landlord means being much more hands-on. You handle the purchasing, any work that needs to be done on the home, find and choose tenants, collect rent, deal with evictions, and more. Even if you decide to use a property management company, you will still be involved on a deeper level than with REITs.
Each of these methods has some different steps in finding a good rental property for sale, so we will take them one at a time.
How to Find a Good Rental Property as a Landlord
As being a landlord is a more complex process than simply investing in real estate, so is finding a good rental property for sale to be the landlord of. The following tips can help.
Choose Your Neighborhood
Let's start with a tip on the general location. Sure, a beautiful house with a wraparound porch and large yard in the middle of nowhere sound like a dream – at least to me.
The trouble is that when people look for rental homes, they typically want to be in the middle of the action. They want the convenience of retail stores and to be close to schools and jobs.
It's not that no one will want a home in rural areas. It's just that you have a better chance of keeping your home rented out in urban spots.
After settling on your general location, it's time to keep a little more specific and pick a neighborhood. These tips can help you pick the best:
Do Some Research
If you hate research, I have to apologize now. Finding the best neighborhood is going to require a good deal of research. It's not typically complicated, but it does take a little work.
1. Check Local Laws and Regulations
Before you jump into anything else, determine if there are any rules or regulations that could impact your goal. For instance, some areas have zoning laws that ban renting out properties. Others allow you to rent but charge for permits and other fees to discourage rental properties.
And, of course, there are those that require little legally. It's best to find out first as a neighborhood you are considering could be a no-go. Go check in with the local courthouse or even a real estate agency. The information is usually readily available.
2. Number of Vacancies
Find out how many vacancies there are in the neighborhood. If the number is high, it does not necessarily mean it is not a good investment. It might just be due to seasonal rentals. However, it could be a sign of a more serious issue. Try to find out if the neighborhood has a history of staying pretty vacant.
3. Crime Rate
Crime is a problem everywhere, so it's hard to avoid it completely. However, you probably do not want to move your family into a high-crime neighborhood. Neither do others.
Choosing a rental property in a neighborhood where criminal activity runs rampant puts you at risk of having an empty home. It might also attract tenants with questionable characteristics, which can cost you in other ways. It is best to find a property outside of high-crime neighborhoods.
4. School Systems
If you aim to rent your property out to families, it is important to check out the local school district. If it's a good school system, you have a better chance of keeping the property rented out. If you choose to sell the property later, the quality of the schools can directly impact the price you get for it. The better the schools, the better your overall investment.
5. Average Rent Income
How much do other homes in that neighborhood cost to rent? This number can do many things. It can tell you about how much you can expect to receive, the quality of the community, and even whether it is on an incline in value or a decline.
6. Local Job Market
Just like parents want to move into good school districts, individuals also want to move somewhere close to job opportunities. Check out the local job market. What is close by – at least within a 20 or 30-minute drive?
Obviously, the closer you are to the action, the better chance you have of keeping your home occupied. However, some factories and other options do not build operations too close to residential neighborhoods. If it is a pretty quick trip to a decent job, people do not typically mind a drive. If there is nothing in or around the area, however, consider moving on.
Have the Property Inspected
A home inspection is usually required to be approved for a mortgage, anyway. Even if it wasn't, though, you would need to have one done. This will tell you if the HVAC, plumbing, electrical, and roofing are all in good shape. Such information will help you determine how much work the home needs and whether it will cost you more than it's worth.
Do Some Calculations
The bottom line is to know if you will make more from the property than you will spend on it. After having completed the previous steps to ensure it is a viable property, it's time to see how much you can potentially make from it.
At this point, you should know how much you can charge for rental – according to the average rent of the area and the value of the home. To keep things simple, let's say that your monthly rent will be $1000. Now, we are going to do some calculations to determine your expenses.
Before we do that, though, understand that these are estimations. Your expenses could be higher or lower. However, these are pretty average numbers and percentages to budget by. Okay, now let's get started.
Mortgage $600 x 12 months
$7,200
Property taxes
$1,000
Homeowners' insurance
$1,500
Vacancy rate
$1,200
Repairs (5% of the monthly rent)
$600
This would put your profit at a little over $40 per month. Bear in mind that these numbers do not include the cost of homeowner's association fees – if there is an HOA in the vicinity. They also do not include the cost of hiring a property management company if that is what you choose to do.
In a case like this, you would need to do one of three things to make a better profit on this particular home:
Get a lower mortgage payment with a lower interest rate or by spreading the mortgage out to 30 years if it's currently a 15-year mortgage
Find lower homeowners' insurance
Raise the rent
Are any of these things possible? If yes, do it and enjoy bigger profits. If not, move onto another home. Otherwise, you will have to run a property for a great deal of time before you see a good profit.
Here are a couple of simple principles to go by that can help you sort it out quickly:
Your mortgage payment – minus taxes, fees, and insurance – should be less than 50 percent of the monthly rent. For example, in our example above, you would need to be able to charge at least $1200 per month
If the rent you can charge is at least 1 percent of the cost of the home, it might be worth a deeper look. In short, if the home's sale price is $100,000, your should be able to charge $1,000 in rent each month
Consider Working With a Real Estate Agent
You have the option to do everything on your own, of course. However, a real estate agent can help you find a rental property to meet your needs. They know where the homes are, have the information you need on the neighborhood, can point you in the right direction with the amount to charge for rent, and more. This is often the simplest way to find a good rental property.
In Conclusion
Jumping into real estate – either through REITs or as a landlord – is a big step to take. It typically comes with many risks and rewards. Starting off strong is one of the most important things you can do – and we can help. The Goalry Mall is full of information and tools that can help you through every step of your financial life.
You can find tips and tricks there for improving your credit, helping you to get a better mortgage rate. You can use our budgeting and debt tools to stay on top of personal and rental expenses. There is also plenty of tips and information on building your wealth and so much more. Visit the Goalry Mall for the resources you need to live a financially secure life and reach your goals.