Buying a Rental Property: Understanding the Rental Market
As we embark on a new year, you may be considering the purchase of another home for rental income. If you have the capital, it’s a great way to invest in real estate and earn equity in a home. Before you move too far in your journey to being a landlord, be sure to take a look at these best practices.
Examine the potential neighborhood
We’ve all heard it at one time or another, “location, location, location!” This sentiment holds true when considering potential neighborhoods for your rental property location. You may have a neighborhood in mind that you adore, but make sure the return on investment, rental-wise, is viable to your purchase. Consider out-of-the-box locations that appeal to renters in your area and see what the market has to offer in those locations. Don’t hesitate to walk different neighborhoods or take a drive to check out different sites. Background research can help you get a better understanding of where your target area should be based on your rental goals. Talk to a seasoned realtor who knows the area well to give you the inside scoop of best locations and potential options.
Compare similar properties in the area
Once you’ve got the location down pat, it’s time to understand property values in that specific area. When you find a list of homes that are added to your potential purchase list, compare them with recently purchased homes of similar size and layout. This is especially helpful in areas that have a higher rental market. See what others are renting out current homes for and determine the similarities and differences between the homes on your list. A comprehensive comparison can help you determine the most suitable home for you.
Know the 1% rule
The 1% rule is a tried-and-true tactic on the investor side of real estate. This rule is often used as a pre-screening tool to determine if a property is worth purchasing to rent. In the simplest terms, the rent on a property should be approximately 1% of the purchase price to ensure it covers the mortgage and provides additional income to the purchaser. For example, if you are considering a home for $100,000, ask yourself if you could rent it for $1,000. If not, it may not be worth the investment. A home with a rental return of at least 1% (or higher) would generally be considered a viable option. You can use this tactic at the beginning stages of home considerations to remove homes from your list and narrow down your search.
Focus on the enticing amenities for your target renter
When considering a rental property in a specific location it is important to know your target audience.
Ask yourself the following questions:
- What are the rental demographics in this area?
- What is the median rental payment in this area?
- What amenities do renters here typically look for?
- What outside-of-home features are important to renters here? School zone? Location to the highway? Location to downtown?
Understanding what makes your target rental audience take the leap and close in on a rental property in the area will set you up for a greater level of success when renting.
Work with a professional to create a lease agreement
Once you’ve chosen to purchase the rental property that works best for your investment dreams, don’t lose sight of the small, yet important, details. The lease is the gold-standard to which you can uphold your rental agreement to; don’t skimp on the creation and maintenance of it. Work with a professional to ensure all fine-print, legalities, and rental requirements are laid out, in detail, in the lease agreement. Review and update the document before every new signing, whether it be to new renters or a renewal. The lease should be a living, breathing document that you and your renter can reference as needed.
Buying to rent is a wonderful investment opportunity for those looking to extend their reach in the real estate world. To learn more about helpful tips and tools to get the most out of your next purchase, contact us. We would love to help you understand all of the facets that come with purchasing a rental property.