Step 3: How to Search for Rental Properties and Analyze Rental Markets
Well done! You’ve defined your investment strategy and secured financing. Now it’s time for the fun part—beginning your search for rental properties. Here are ten factors to consider when evaluating a market as well as a specific prospective property.
- Assess local vacancy rates: Low rates indicate a highly-saturated area. You’ll probably be able to rent your property more easily when area vacancy is low.
- Gauge unemployment rates: What are the unemployment rates in the market? If they’re high, the market may be experiencing volatility, which can present risk for investors.
- Evaluate job growth: Are jobs being created? With jobs come people who will need housing.
- Track population growth trends: This one seems obvious; population growth tends to indicate desirability. If people want to live in an area, that generally translates into good news for investors.
- Look at the economic diversity: A diverse economy powered by multiple industries is usually more sustainable than an area dominated by a single industry.
- Consider the neighborhood: Evaluating school and crime data can help you decide whether the neighborhood fits your investment strategy.
- Understand the metrics: Every investor ought to consider and understand the following key metrics: Cash Flow, Cap Rate, Cash on Return, Gross Yield and Depreciation/Appreciation. Click here for more detail, including how to calculate values. Be wary of adding speculative Home Price Appreciation to the evaluation mix—you’re better off investing in what you know you can get, not what you think might happen in the future. Be sure to know your all-in expenses, including taxes, HOA dues, insurance premiums and other common costs. If your prospective cash flow won’t offset these expenses, the deal might not make sense.
- Get a thorough inspection: Inspections are crucial! While they can cost a couple hundred dollars, they are a wise investment. An inspection will be key in helping to identify whether a property is a viable investment. Inspections uncover things you might not see at first glance. For example, if the inspection report details a faulty roof, it affords the investor the opportunity to either request seller concessions or rescind the offer.
- Consider maintenance costs: What improvements does the property need to prepare it for renters? What are the expected property management fees? How much will it cost to turn the property between tenants?
- Build your resource network: You’ll likely need several key experienced players in your investor network, including an agent, a property manager, a title company, a lender, an inspector and a general contractor. Tap into Investability’s community of preferred providers to begin building your team today.
Leave questions or comments below—we want to help you navigate your real estate investment journey. Click here for the fourth blog in this series - How to Make an Offer on an Investment Property.