Although investing in a good rental property can prove highly profitable, success in such ventures is by no means guaranteed. In fact, depending on how much effort and research you put into your first rental property investment, you may find yourself stricken with buyer’s remorse. Conversely, if you take the time to do your homework and educate yourself on the intricacies of the rental property market, you’re likely to be very satisfied with your investment. So, in the interest of maximizing the ROI on your first rental property, put the following tips to practical use.
Carefully Consider the Cost of Repairs and Renovations
Many of the rental properties you come across are going to require repairs and/or renovations. In some cases, these will be fairly minor and won’t place much of a strain on your financial resources. However, if a property needs significant repairs/renovations in order to be habitable, there are a number of factors you’ll need to take into account.
For starters, you’ll need to consider how much income you stand to generate from this property versus how much money you stand to lose from renovating it. Needless to say, if repair/renovation costs are considerably higher than your projected long-term profit, it may be a good idea to walk away and seek out other single-family renovation investment opportunities.
Do Some Research into the Location
You’d be hard-pressed to find a real estate professional who isn’t intimately familiar with the mantra, “Location, location, location!” When searching for potential investment opportunities, many seasoned property owners are more concerned with the area in which a property is based than the general condition of the property itself. After all, even a property that’s lacking in space and/or amenities is liable to generate a healthy profit if it’s located in a highly desirable, in-demand locale.
So, before purchasing your first rental property, take care to research rental rates in the area. Should you discover that the rates you wish to charge are uncommon – if not outright unheard of – in a specific area, you’d do well to look for other properties. Additionally, throughout the course of your research, make sure to look at an area’s crime rates, rate of growth, job market and population.
Properly Vet Rental Applications
Even if you’re able to get your hands on a great property in a desirable area, this investment will essentially be worthless in the absence of good tenants. Tenants who are unable or unwilling to keep up with rent stand to make your job a lot harder and cost you a significant sum of money. Furthermore, depending on where you’re based, evicting tenants for nonpayment of rent can be a long, arduous and costly undertaking.
To minimize your chances of ending up in such an undesirable situation, you’ll need to thoroughly vey every rental application that comes your way. You can start by running a credit check on every prospective tenant. While virtually every American is carrying some level of debt, it’s reasonable to assume that an applicant who’s absolutely awash with debt may have trouble staying current with rent.
Secondly, confirm that every applicant has consistent income and is able to comfortably afford rent. As a general rule, applicants should make at least three times the cost of rent each month. However, if an applicant’s income comes from disability payments, Social Security or well-to-do cosigners, exceptions to the rule can be made.
Depending on the locale, you may also be able to run a criminal background check – with the applicant’s permission, of course. Although a criminal history needn’t necessarily preclude an applicant from being approved, it’s best to approach such matters on a case-by-case basis. For example, if an applicant was charged with crimes that could pose a risk to your personal safety, the safety of other tenants or the safety of the property, they may not be a good fit. As an added precaution, make sure to advise all successful applicants to invest in renters insurance, since homeowners insurance cannot be applied to rental properties.
There’s little wonder as to why so many passive income seekers invest in rental properties. After all, a single property in a highly desirable area stands to net you a small fortune on a monthly basis. However, becoming a property owner without understanding the finer points of such a venture is unlikely to work out well for you. As such, fledgling property owners looking to see a healthy return on their investment would do well to consider the measures discussed above.
