The Ultimate Checklist for Evaluating Rental Properties

Countless people have become millionaires after accumulating properties and setting up a rental income generation strategy. Countless more have supplemented their income with passive revenue streams that give them more financial support. If you don’t have much experience buying or selling rental properties, this may seem like a distant, foreign concept to you – but the truth is, almost anyone can get started managing rental properties with even a single acquisition.

The trick is to find good rental properties. A solid, reliable property will generate revenue in excess of its expenses, quite consistently, and hopefully appreciate in value over time. That said, a bad property can accrue expenses exceeding revenue, ultimately putting you in a financial pit.

So how do you determine the good properties from the bad ones?

Unfortunately, this is a complicated question, but we can help you by directing you to the core concepts you need to consider and evaluate in your decision making.

The Value of Professional Insight

If you don’t have much experience on your own, it’s extremely beneficial to get the help of a professional advisor in your decision. Even if you do have experience, it never hurts to have a second set of eyes on what you’re researching.

A property management company like GreenResidential is arguably the best choice in this scenario. Most property managers can connect you to a real estate agent, who can help you evaluate prospective deals and properties to add to your portfolio. If you choose to move forward, you can enlist the services of the property management company to manage your property actively. Failing that, you can always contact a real estate agent or work with other experienced real estate buyers to strengthen your decision.

Everything You Need to Check When Evaluating a Rental Property

When evaluating properties, be sure to look at the following:

·       The price. The first thing you need to look at is the price. No matter how good the property is, it becomes untenable as a rental property if the price is too high. This often happens in highly competitive markets, but it can happen to almost any property. If you’re taking out a loan for the property, this is especially important, since you’ll be taking on significant debt in the acquisition.

·       The local housing market. Next, you need to look at the local housing market. What are houses going for? How in demand is the market? Is this a truly good deal, given other houses for sale in the area?

·       The local rental market. After that, you can start speculating about the potential returns you can have on this house. How many units are there and what can you justify charging for rent? The best way to approach this is to research rent prices for similar houses in the area. Would you be able to make a profit even if you charged less?

·       The future of the neighborhood. You also need to look at the neighborhood and speculate about its future. Good neighborhoods tend to be very safe, next to good schools, and with good access to transportation. They have low crime rates, high employment statistics, and clear reasons for optimism for the future. Obviously, you can’t predict the future, but you can look at current trends and speculate about how they might unfold in the coming years. Will this area be more attractive or less attractive in the future?

·       Your current finances. Much of your decision also depends on your personal finances. If you have abundant assets, reliable revenue, and an emergency fund saved already, you can afford to take some more risks. If your finances are tight and this is going to be a somewhat risky decision for you, you need to be absolutely certain the property is airtight.

·       Property tax costs. Be sure to research property tax costs, as many novice property buyers underestimate the costs of taxes. Keep in mind that property taxes often increase in popular areas on an annual basis.

·       Insurance costs. Similarly, you’ll need to look into property insurance costs. If you pay for the property in cash, insurance is technically optional, but this can protect your investment and should therefore be strongly considered. If you finance the property with a mortgage, your mortgage provider may require you to have insurance in place.

·       Maintenance costs. It’s a good idea to estimate maintenance costs as well, even if you don’t have a clear idea on how much maintenance this property will require. How much upkeep does this property need? Does it require any repairs before renters live here?

·       The condition of the property. A basic home inspection only costs a few hundred dollars, but can reveal crucial details about the condition of the property you may not notice on your own – even if you have some experience buying properties. Always secure a home inspection before finalizing the deal. If there are any standing issues, work them into your calculations and consider reducing your offer price in line with what you find.

As you can see, many of these concepts are complicated and aren’t associated with clear, black and white answers. Instead, you’ll need to consider these factors in abstract and together with each other to determine whether a given property is worth it. Even then, every property acquisition does come with risk, so do as much due diligence as you can to make an educated decision.