Rental properties are a popular investment choice and for many people they are one of the first major investments they make when looking to diversify their earnings. However, without proper research and planning, a bad property purchase can easily turn into a burden and operate at a loss. The following seven factors should be considered before purchasing rental properties to ensure the best chance of profitability and the appreciation of your real estate investment.
Seven factors that affect the profitability of rental properties
- Property taxes: the amount of taxes paid on a property can vary greatly from state to state, county to county and even city to city. It’s important to know the property tax rates that will be imposed on a particular property as higher taxes directly reduce profit margins.
- Location: the location of a property affects the type of applicants a rental property will receive and the rental rate that can be charged. For example, a high-rise apartment building in downtown will attract a different clientele than an older condo building located next to a college campus.
- Area performance: another factor to consider is how other rental properties in the area are performing. If there is a high vacancy rate among local rentals or local units have lower than average rental rates, it could be a sign that the area is in decline and that people are moving to more desirable areas.
- The local job market: a healthy local job market is a good sign for rental property profitability. As people move into a town or city, the potential tenant pool increases as the need for housing goes up. The result is lower vacancy rates that tend to increase the local rental rate.
- Crime rates: local crime rates can have a notable impact on a property’s vacancy rates, reputation, and the amount of rent a property can realistically be worth. Check crime statistics for the area a property is located in, noting the types of crimes and the percentage that are reported to the police.
- Weather systems: every part of the country has different weather systems and natural disasters to deal with. Be aware if a rental property is in a geographical area with common issues such as flooding, hurricanes, blizzards, earthquakes, or wildfires because natural disasters affect profitability and are often unpredictable.
- The surrounding area: consider what the property is close to. Many renters will pay for amenities such as access to mass transit, easy access to an interstate, local parks, gyms, shopping areas, and more. Accessibility makes a property more attractive to potential renters, keeps vacancy rates low and can increase the rental rate.
Selecting a profitable rental property is more complex than just buying the first available home or apartment complex. A great deal of research should be done before choosing an income property to purchase. The seven factors discussed in this post can be a launching point to your research.
Son-Rise Property Management has been serving the property management needs of Bellingham and Whatcom County since 1996. Contact us today to see how we can help you find a rental property for your family or manage your rental properties.