The primary goal of investing in real estate is to increase net worth. Although considered high-risk assets, investment properties present high return on investments (ROI) when they are cash-flow positive. Investors who rent their properties aim to earn more than their invested amount, which includes down payments, closing costs and upgrades, through rental income and value appreciation. New investors should be smart about their investments and conduct thorough research on potential properties before making blind offers.
To best avoid “money pit” rental properties and shape profitable investments, evaluate properties based on the following categories.
As with any real estate location cannot be changed. Therefore the most important step in selecting a property is choosing a neighborhood. Investors seek different neighborhoods depending on the tenants they want to attract. Property owners looking to market to young professionals usually consider urban neighborhoods close to corporate offices, nightlife and shopping. Investors who plan to rent to families might search in neighborhoods with top-notch school rankings. However, locations featuring more desirable qualities such as lively bar scenes or decent school districts cost significantly more. To attract similar renters while adhering to a budget consider properties in outlying neighborhoods close to bus routes. Access to transportation helps attract the same caliber of renters without the high price tag. Most amateur investors likely lack the funds to acquire large, high-rises in city centers, and lessees can live in more remote neighborhoods for less.
Amenities and Upgrades
Many apartments today feature state-of-the art amenities. Pools, spas, pet runs, communal kitchens and rooftop sundecks are common features of luxury rental properties. Small multi-family unit owners can still wow their applicants with a variety of amenities, such as in-unit washers and dryers, printing centers, fitness rooms and courtyards.Single-family home investors should search for rental properties with open-concept layouts, private backyards, garage parking and ample storage space. Keep in mind that spaces equipped with the aforementioned perks are more expensive than standard homes for rent. However owners of dynamic properties have the opportunity to charge more for extras. Investors usually receive returns-on-investments for amenity-related expenditures. Plus, properties with renter perks fare better on the market, limiting vacancy periods and ultimately yielding higher profit. Still, luxury features can usually be installed later, so don’t look past basic properties in good locations. Consider performing more extensive modernizations later when rental income can supplement construction costs. Also, superfluous amenities won’t attract level-headed renters. For instance, residents who live in predominately cold climates avoid higher rent overheads for outdoor pools they can only use a few short months out of the year. Similarly to location, consider desired tenants before selecting which amenities to incorporate in rental properties.
Investors need to account for maintenance costs before determining their budgets. These may arise immediately, or a few months into ownership. Regardless, keeping properties up-to-date is imperative for tenants’ safety. Ensure prospective properties are in good condition by hiring professional inspectors prior to closing. Buildings may look fine on the outside and have a slew of underlying issues that cost thousands of dollars to fix. Foreclosures, for instance, are usually listed for less than their market values, but lack of prior knowledge on property conditions is concerning. Owners might end up paying more in repairs on foreclosures than buying buildings with higher list prices in good condition. Unanticipated repairs can severely hurt investors financially. Regardless, always set aside extra money in case of property maintenance emergencies.
These are all jumping off points for investors, and they must extensively examine their investments prior to making offers or finalizing contracts. Otherwise, they could end up making ill-informed decisions that hurt their financial futures.