Each year, new entrepreneurs and established investors fact the same question: What are the best rental properties to buy? As the housing market grows more challenging, the real estate game also intensifies. The current climate makes it tougher to choose a good rental property.
How can you navigate the land mines that pepper the field of investment property ownership? How can you find the best rental properties to buy?
This blog has answers that will help eliminate some of the risks associated with becoming a property owner in today’s volatile markets.
Preparing for Today’s Markets with the Best Rental Properties to Buy
The latest data from Bankrate shows that real estate is a more popular option for investing today than the stock market. Historically low interest rates over the past decade, coupled with rising rent prices, make for potentially lucrative returns on property investments. While interest rates rose this year, the reality is that real estate tops the list of investments that yield a consistent return. During times of inflation, real estate is a good hedge to protect your money. Equity becomes the return and higher rent means more cash flow.
When you consider that the current average rate of return on residential properties is 10.6% and commercial properties yield 9.5%, it’s clear that real estate investing is a solid choice. But how can you ensure you’ve selected the best rental properties to buy?
How to Choose a Good Rental Property
Real estate investing and property management can seem mazelike for the uninitiated. To maximize a faster rate of return, you should look for:
- A fully refurbished or a new construction residential zoned property.
- A growth market where the population is increasing.
- A property with the potential for positive appreciation.
Of course, you have many other options; new builds and rehabs to name two. But finding a ready-to-rent property in a great location yields a much faster return.
No matter your approach, here’s a checklist of features that make for a potentially good rental property investment.
1. Location, location, location.
The location of the best rental properties is hugely important to your decision-making. Whether you’re flipping a property or shooting for a ready-made rental investment, understand that attracting a good quality tenant rests in part on what area of town the home is in. Conduct due diligence around
- What is the rating of the nearest schools?
- What is the crime rate and what do trends illustrate?
- How is the local job market?
- Are vacancy rates high or low? Low vacancy rates are a good sign that you can charge higher rent.
- What is the climate? This is an unusual criterion to add to our list, but given the increase in natural disasters like flooding recently, are there geographic or terrain-related considerations for the properties you’re evaluating?
- How close are amenities such as parks, restaurants, and even transportation hubs?
- What does the rental market look like in that region? What kind of average purchase prices will you face? What’s the average rent?
- Is the area growing? What kind of economic development is going on? What are the projections?
Ideally, you’ll select a rental market aligned with your investment strategies. If you’re strictly looking at cash flow and not appreciation, you may be able to pick up properties for a better rate in more up and coming neighborhoods. In more popular markets, you’ll likely pay more, given that the competition for finished properties is high. However, the long-term appreciation of these properties may be higher than a less popular neighborhood.
2. New Landlord? Consider a Single-Family Home
If you’re just starting out, a single-family rental is a great investment. Upkeep is easier with a single tenant. Outlay on repairs is less. If you choose well, you’ll potentially save on refurbishment or new construction and even have a quicker turnaround on rent (and cash flow). With this said, the current supply of single family homes is short; CNBC says we need about five million new builds to keep up with the demand. The problems with supply chain and labor shortages during COVID stymied investors and slowed the availability of new homes to a trickle. This translates into a simple fact for new landlords: Investing in a single-family or duplex structure right now is a potentially lucrative step. If you can snap up foreclosures or properties that need repairs, now may be the best time to do it.
3. Carefully Calculate Property Taxes
The dilemma is that the best locations often have the highest taxes. As you’re selecting the investment, consider the local tax rate as part of your ROI calculation. The questions are simple:
- What historically can you see from the tax rate?
- Can you recoup rising taxes with rent increases and how do these projected increases compare to the area?
It’s a catch-22, especially for new landlords. The best properties that stand a higher chance of attracting top quality tenants are often near good schools. But good schools often mean higher taxes. The idea here is to determine what’s happening in the market within the context of what you’re able to handle.
The beauty of real estate investing is its passive rate of return. However, the tenant/landlord relationship intensifies the complexity of this investment channel. It brings an element of risk to an investment strategy that continues to be a sure thing year in and year out.
If you’re looking for a truly passive investment with a high rate of return and a low “hassle factor,” hiring a property manager to handle tenants is critical. Here’s what to look for in a good property manager.
How to Choose the Right Property Manager
You cannot select the best rental properties to buy unless you also consider whether you will manage these locations yourself or hire a property management company. Having a rental property manager that you can trust allows you to focus on key strategies related to building your business—instead of worrying about finding good tenants, collecting rent, or handling vendors for upkeep.
Tenant Planet combines the best service platform with an effective on-the-ground team to manage your investments. Find out why we are the most trusted resource for investors in the Bay area, Orange County, and San Diego. Call on us at 1(844) 875-2638.