How to Choose Rental Property
Learn how to choose rental property today. Then click here as we reveal the time-tested methods of choosing the right rental property.
A Rental Property is Not Your Dream Home
One fatal mistake that some property investors make when choosing rental property is to treat it like they are buying their fantasy homes.
Always bear in mind that your rental property is a long term investment. Being a landlord is more like running a business rather tending to a personal hobby. It's highly important that to have the right mindset when you select rental property.
It doesn't matter if the property commands a stunning view of the seaside or enjoys lovely weather in spring - What you want is healthy financial figures, a ready supply of tenants and potential for property appreciation.
For rental properties, the financial ratios that matter are: rental cash flow, rental yields and cash on cash return. For more details on these ratios and how to calculate them, Click here for our step by step rental property accounting guide.
Since some investors consider rental cash flow to be the single most important criteria to choose a good rental property, let's elaborate on it a bit more. Ideally, you will want a property with positive cash flow, meaning that its rental income (rent from tenants) exceeds its total rental expenses (mortgage payments, insurance premiums, repair bills, agent fees and other costs).
Is There a Sustainable Supply of Tenants?
How to choose a good rental property: It goes without saying that tenants are the lifeline of all rental properties. That's why it's crucial to assess if there is a ready supply of suitable tenants for the property.
For a clearer picture on the quantity of potential tenants, pay attention to the vacancy rates in the area. Vacancy rate is the percent of rental properties in an area that is unrented. All things being equal, you would want to choose rental property in an area where vacancy rates are low and/or dropping.
If you're from the United States, it's helpful to know that the United States Census Bureau publishes the rental vacancy rates for all U.S. states and major metropolitan area every quarter.
Where there are work opportunities in an area, tenants will often follow. The kind of jobs available will decide what type of tenants you are likely to find. A upscale condominium in a business district is going to attract more tenants and higher rents than one near an industrial estate.
Popular school districts also make ideal locations for larger rental properties such as a three or four bedroom single family home. If the children are well-behaved, families can make the best tenants in terms of rent stability and (low) turnover rates.
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