Is It a Good Or Bad Rental Investment?
When you’re purchasing a rental property as an investment, you’re really looking for a good long term investment. The problem is, how can you be sure it works, and how can you tell a good rental property from a bad rental property?
Fortunately, there are a few things you can look at to help put the odds of finding a good rental property in your favor. This article will address a few of them.
Before anyone purchases a rental property, they should really do some homework regarding the local economy, the neighborhood they are considering purchasing in and the local rental markets. So yes, there is homework involved.
Economic Factors
I’m starting with economic factors as I feel they are one of the best indicators of long term success for a Real Estate investor or beginning landlord. You really want to choose an area that gives you an advantage.
While it’s true there is rental property in just about every city, county and jurisdiction, these areas are not all created equal and understanding the local economics can give you an unfair advantage over those that don’t. This advantage doesn’t necessarily translate directly to success, but it does make it easier.
Some of the factors I refer to as economic are items like unemployment rates, new businesses coming to the area and even the general age of the local population.
If you look at historical unemployment rates for the area you are considering you’ll find a mountain of potential information. Ideally, you’ll be looking at an area where people are moving to for work and unemployment has been quite stable (low and stable) or has been exhibiting a trend of dropping over the years.
Right off the bat, this makes Detroit a bad choice. Sure you can get into rental properties very cheap, but with extremely high unemployment and not to bright of a future it doesn’t bode well for getting paid rent on time and potential increase in values in the near future.
If you know of new businesses coming into an area, this too can be a benefit. The biggest example currently of this is throughout the Dakotas where the oil and gas industry are working like crazy. While many of the workers will end up being transient and not necessarily sticking around the area, the huge growth in these industries also trickles down to new restaurants, stores and businesses that serve these workers. These businesses have employees who will stick around and will be getting paid.
Another area to look at is the general age of the population. If you have a relatively older population in the area, does that mean a sell off is in the near future as they retire? Will this form a glut of properties on the market affecting rents and values?
On the other hand if the population is relatively young, will they be transitioning to purchasing in five years from renting? Will this put extra pressure on home values going up and lending itself to more growth in the home building industry?
These are the types of questions serious investors look at when purchasing in areas and if you’re serious about being successful, they should be part of your process as well.
I know dozens of investors, very successful investors, who don’t even buy in the same region they live in. they have hand picked cities and towns hundreds and thousands of miles from where they live. it might be daunting, but it also reduces much of the risk.
Other questions to consider;
- Is the local government pro economic growth?
- Is there positive in-migration to the area?
- Are wages increasing in the area?
- and many more!
Anyway, this is part one of analyzing rental properties, in a few days I’ll add my take on rental neighborhoods and then after that I’ll go into local rental markets. Finally to close it up, I’ll just go over some of the math you can use to determine if the rental property you either currently own, or are looking at has a better chance for success.
So, is this helpful? Can you use this as a starting point in your education as a landlord and in expanding your rental portfolio? I’d love to hear your thoughts and any other ideas you can add.