Before buying any property, you must do substantial research.
Not only do you need to learn how to attract tenants and manage them as a landlord, but you also need to determine whether your investment will be a profitable one in the first place.
To know this, you’ll need to analyze the housing market in the local area.
Market analysis at any time can be challenging as there are many factors at play. For instance, the property’s geographical location, local population, and historical rent rates all play a role in how profitable an investment will be.
You should also consider using a checklist for buying rental property so you don’t skip any critical steps in the legal or financial process. All the market research in the world can’t help you if you’ve forgotten a key step like conducting a property lien search or performing an inspection.
Here are some factors to consider in your market analysis before buying a rental property.
Location always plays a role in real estate investing. Think about where the property you’re considering is located and what this might mean in terms of rental demand.
What kind of tenants is the property likely to attract based on its surroundings?
Large city centers or landmarks may attract tourists or travelers, which would make your property a great candidate for a short-term rental. Likewise, properties near the coast will attract visitors looking for accommodations on their vacations. Plan to lease your property accordingly.
Local Demand for Rentals
Rental demand is a major consideration in whether you’ll be able to keep your units filled consistently.
You may be tempted to purchase a property that seems inexpensive, in relatively good condition, and located in a great neighborhood. However, if demand in the area is low (for example, if locals in the area want to own homes rather than rent them), then this property will still be a poor investment. You won’t be able to fill your units or generate enough rental income to keep your business afloat.
Job and Population Trends
Likewise, jobs and population trends also play a role in a property’s market value.
An influx of new job opportunities will draw young professionals and other jobseekers to the area. These individuals will undoubtedly seek rental housing as they relocate.
Similarly, cities currently receiving new residents due to population movement are also likely to be profitable places to rent housing. Properties in these areas will have little trouble attracting reliable renters.
Local Rent Rates
Local rent rates are probably the greatest indicator of the cash flow potential of a property.
If local landlords are charging high rates for rent, you’ll need to charge similar rates to stay competitive. It also means there’s likely to be high demand for rentals in the area, leading to high cash flow.
Oppositely, if local rent rates are low, charging a higher rate will probably make it difficult for you to secure any tenants willing to pay that amount unless you offer better features or amenities. The other, cheaper options in the neighborhood will likely attract more renters.
You should also assess ROI, or the return on investment for your property. ROI for rental property is the amount of income you expect to earn divided by the cost of your initial investment. An ROI above 10% usually means your property will be a profitable investment.
Amenities, Square Footage, and School Districts
Lastly, the amenities and features of properties in an area are good predictors of the potential of your investment.
Properties with many included amenities, utilities, or additional square footage can be rented at higher rates, attracting higher-paying renters and higher returns for your business.
Likewise, when considering what to know when buying a rental property, few landlords think of schools. However, the school district that a property is located within is an understated factor.
Good school districts attract young families looking for permanent homes and make properties nearby highly valuable. This means consistent rental income and filled units year after year.
So, is buying rental property worth it? Even considering the hard work and research you must dedicate to your investment, the answer is almost always “yes.” By researching and analyzing the market in the local area before you make any decisions, you can set yourself up for promising returns and a healthy investment.