What Makes a Good Rental Property Investment?

Thinking about buying your first rental property? Your first step should be to search for homes for sale online, and then save your search so that you get alerts when new homes hit the market in your price range. This will give you a sense of how much homes are selling for, and you’ll quickly learn how to spot a good deal.

Once you’ve found a property that you think would make a good investment, ask yourself the following questions to determine if the rental property will be profitable and if you’re ready to become a landlord.

Questions to Ask Before Buying a Rental Property

1. How much can you rent it for, and what are the expenses?

When evaluating real estate as an investment, it is important to look at it from a cashflow perspective rather than an appreciation perspective. In other words, will you make money each month, or will you have to wait until the value of the home rises before you make a return on your investment?

The best way to estimate what you can earn is by looking at comparable rentals on sites like WalkScore.com, which has homes for rent as well as information on amenities nearby that make the home desirable. When you purchase real estate, there are fixed costs, like the principal on the mortgage, interest expense, property taxes and insurance. These four expenses are known as PITI.

When evaluating a property, the first step is to calculate cash flow: rental income minus PITI. If you want to be more conservative, you may add other variable costs, such as vacancy and maintenance. If the property cash flows are positive, then it makes sense to investigate the property further.

2. Will there always be demand from renters?

Next, I look at the important lifestyle factors that will appeal to future tenants. Is the home located next to highly-rated schools? Employment opportunities? Public transit? Is there a popular destination nearby that people will always want to live next to? While the quality and condition of the property will determine how much you can rent it for, the location, as always, will have the biggest impact on whether or not you can find renters each month.

You’ll also want to consider areas that may not be hot now, but will be in the near future. Once people are priced out of New York City, where will they migrate? Brooklyn! Once people are priced out of San Francisco, where will they migrate? Oakland! Each year Redfin publishes a list of areas that we predict will be the hottest neighborhoods of the year. These areas all represent excellent investment opportunities.

3. Who will manage the property?

Some investors like to have as much control as possible of their property and therefore manage it themselves. This means it is probably best to manage properties closest to where you live. However, if you are building a business with investment properties, then you’ll want to hire a professional property management company to oversee the full process. That includes hiring service providers to prepare the property to lease, marketing it (professional photos, online ads, “for lease” yard sign, etc.), hosting 1-2 open houses, screening tenants, creating lease agreements, and maintenance. This will free up time to spend with family, friends, and go on a real vacation.

In order to start, hire a great real estate agent who can refer you to a great lender and great property manager. Hire your team early in the process and reap the rewards. For more information, check out How to Get Started in Real Estate Investing.