The decision to become a landlord is certainly exciting – the search for a property, marketing for a tenant and potential to bring in money every month.
But before you go buying the first empty house you see – or worse, a house you didn’t even look at – know that your investment is better made when you’ve carefully run the numbers.
Every investment property requires a careful assessment of the value of the property, amount of debt you’ll take on, expected income and other operating costs. Those property-specific numbers are also dependent on the local rental industry. Here are four things to consider as you look for the right rental property.
Find the market and submarket. A property in your neighborhood may seem like the most convenient investment option, but that doesn’t mean it’ll be worth your time and money. You first need to identify the best market for your investment, plus the submarkets – often broken down into neighborhoods – where a rental property will be most fruitful.
If you’re planning to manage the property yourself, your local market makes the most sense. Now, narrow down submarkets based on where renters are more likely to search – for example, near public transportation or within easy access to highways.
Property classes are typically broken into three categories: A, B and C. Properties in Class A will be the top quality in that market, typically new and higher priced. Class B properties tend to be a bit older but well-maintained. Class C properties are older still, often in need of renovations and repairs and located outside the prime real estate locations.
Age, architectural style and renovation specifics can vary based on location. A Class A building in New York City isn’t going to compare with a Class A building in Huntsville, Alabama, simply because they attract two different types of residents.
You may be better off focusing your investment toward a Class B or C property, because while there may be some required work on the property, you avoid narrowing the pool of potential renters with an expensive rental rate.