As a prudent investor, carefully evaluating potential rental properties is one of the most critical decisions you make. When analyzing a new rental property, there are five key things you need to thoroughly assess to determine if it’s a good opportunity or not.
- Location
Location is frequently cited as one of the most important factors impacting a property’s value and rental potential. Look at the overall location of the property including proximity to major employment hubs, public transit, airports, hospitals, schools, shopping, and entertainment options. Truly evaluate how convenient and desirable the location is for potential tenants. If the location is not strong, the property may struggle to attract good tenants and command fair rents. Beyond the general area, analyze the specific location of the building itself. Things like visibility, parking availability, pedestrian accessibility, proximity to neighbors, possible noise factors, crime rates, and local regulations come into play. Some buildings may have a prime street-facing location while others may be more secluded. Analyze options thoroughly through research and if possible, visit the property in person to get a feel for it.
- Property Condition
The overall condition and quality of the property should be evaluated closely. Look at the age, square footage, layout, amenities, condition of all major systems including roof, electrical, plumbing, heating and cooling, appliance selection and lifespan remaining, any necessary or planned renovations or repairs, curb appeal, storage space, and general aesthetic appeal. Higher quality properties in excellent condition will typically rent more easily and hold value better than lower quality properties needing significant work.
- Comparable Rents Analysis
One of the best ways to determine if a potential rental property’s asking price or potential rent is reasonable is to analyze what other comparable properties in the local market are renting for. Look for properties that are similar in size, amenities, age, condition and location. See what kinds of rents they are able to command. If a property seems to be priced above the going rates for its comparable properties, the potential rental income may be over-optimistic. Make sure any revenue and cash flow projections account for this.
- Holding Costs
In addition to the purchase price of a property, you need to consider all the ongoing costs associated with holding and managing a rental property, often referred to as holding costs. This includes property taxes, insurance, maintenance, repairs, property management fees if using a manager, mortgage payments if financing the purchase, eventual capital expenditures, and any opportunity costs of your down payment funds. Make sure the rental income can cover all these costs and still provide a good profit margin.
- Investment Objective
Your investment goals and objectives should determine whether a particular rental property makes sense as an acquisition. Consider whether you want monthly cash flow, long-term appreciation, tax benefits, or diversification. The ideal rental property will match your key investment objectives. If a property does not align with why you want to buy it, you are unlikely to be happy with the investment decision in the long run.
Thoroughly evaluating these five key factors – location, property condition, comparable rents, holding costs, and investment objectives – can help you make prudent decisions when analyzing potential rental properties. Making a disciplined analysis like this for any new property can help ensure you only move forward with opportunities that are compelling and positioned to generate strong returns with an appropriate level of risk.