How I Choose A Rental Property
Since I’ve acquired a few rental properties and have enjoyed some level of success I thought I’d share some things I’ve learned and my thoughts on how to best position yourself for success. I may have a slightly different perspective than most, but it’s based on real world experience, being open minded and flexible and constantly analyzing what is working and why. Many people look only at the numbers to determine if a rental property is a good investment or not. I, on the other hand, blend analytics with subjective factors that impact success.
Your Property Is A Product - Treat It Like One
In order to be successful in the Rental Property business you need to think of your rental property as a product that you’re selling. Whether you’re renting out a house long-term or plan to sell it, you have a product that you want people to pay for. Like any product there’s always competition, so you’ll need a quality product that stands out among the rest. Emotion plays a large role when many people decide on a place to live. Ultimately this will be the home they will be living in for at least a year. Their decision taps into their emotional side and will be greatly impacted by things like; beautiful spa-like bathroom with soaking tub, upgraded kitchen with custom design elements, clean, nice paint, custom backsplash, porch swing/bench, large deck to entertain.
Don’t forget location. Is there a nearby trail where they can bike or run? How about restaurants and retail they can walk to? Future renters will be making their decision based on lifestyle and if the house feels like “home”. Since this is not an investment for renters you need to keep in mind that future improvements to the area are meaningless to them. They only care about how the house and neighborhood will be on move-in day. So if the house isn’t in the nicest area then the interior of the house will be a larger factor. If the location is amazing then the interior might be less important. Of course if you have both, your property will be in high demand.
Neighborhood Potential
1) Growth Catalyst
If your main objective is price appreciation you’ll want to identify any potential growth catalysts. New major developments or amenities like parks, trails, entertainment centers or new retail and restaurants that are on the horizon are all great indicators that the area will most likely improve in the future. Improved areas draw more demand and result in price appreciation. This is the #1 factor I look for when investing in rental properties.
2) New Trends
Macro and micro trends can significantly impact the growth potential of your rental property. For example, are more people moving in town than the suburbs or vice versa? Are people prioritizing more space and a yard over smaller living spaces in more dense areas? Keeping on eye on these trends can help you acquire a rental property that will be in high demand (easier to rent out) and that might appreciate faster.
3) Neighborhood Momentum
Don’t get in too early. No matter how well thought out and sure of your thesis you might be there’s always a chance that you’re wrong. When I’m investing in an underserved area that I expect to improve significantly I want to see some level of momentum. I might miss the first 10% - 20% of appreciation but I’ll be ok with the next 100% - 300% appreciation. Keep in mind that your investment thesis can be be correct in the long-term while your actual investment could be a failure if your timing is off. For example. If the neighborhood you believe in doesn’t start to turn around for 10 years, then investing in that area today is a poor investment (even though you’ll ultimately be correct). Don’t be too greedy or try to outsmart everyone. Ride the wave. But wait until see the wave starting to form before you jump on. You can’t go into still waters and expect to surf back to shore if there are no signs of an imminent wave.
Property Characteristics
1) Quality Construction
Quality construction is important when purchasing any piece of real estate but it’s especially important for rental properties. When you’re analyzing you’re expected revenue and expenses you need to limit (as much as possible) unexpected repairs due to poor construction quality. This is less of an issue if you purchase a property that has not been recently renovated. Unfortunately some houses that have been flipped do not have quality construction since some flippers cut as many corners as possible to save on cost. Make sure you do your due diligence and inspect the property as thoroughly as possible.
2) Floorplan
The floorplan is one of the most important factors when renters/buyers decide on a home. Make sure you choose a property that has a floorplan that aligns with current demand. You can paint walls, replace flooring easily but changing the floorplan is difficult and costly. A nice property, in a nice area with a terrible or non-functional floorplan will turn away many qualified renters and may force you to lower the rent or offer concessions.
3) Design Elements
Upgraded, current design trends draw more attention and make your property more appealing to potential renters but be careful. You may come across a design that you absolutely love but is very specific to your taste and could turn off potential renters. Make sure the design is classy, looks high quality and appeals to most prospects. If you do want some unique design elements make sure it’s something you can change easily if trends change.
4) Potential Improvements
Look for aspects of the house where you can make simple improvements without being high cost and require highly skilled labor. Maybe you can improve the landscaping, lawn, flowers etc. Paint, upgrade appliances etc. These are simple, relatively low cost improvement that could make a dramatic difference.
5) Wow Factor
The “Wow Factor” is something I don’t hear anyone talking about. This ties back into how potential renters/buyers decide on their home. You may have checked all of the boxes, quality construction, functional floorplan, nice design elements, neighborhood growth catalyst but when it’s time to find renters I want my property to stand out among the rest. That’s why I look for (or construct) a “Wow Factor”. Depending on the current market there might be a lot of competition. So I want potential renters to fall in love with my house and can’t wait to fill out an application and move in. The “Wow Factor” is obviously subjective but can be things like a soaking tub in the master bathroom, an amazing kitchen backsplash that really pops, a huge deck and yard that is great for entertaining, a massive kitchen island with beautiful granite or quartz countertops. But be careful. You need to balance the “Wow Factor” with ensuring it appeals to the majority of people or you’ll risk turning off potential renters.
Run The Numbers
We all know that all the factors I listed above don’t mean much if the numbers don’t work. I’ll dive into the financial aspect of rental properties in a separate post. As important as the numbers are (and I am a numbers guy) with more and more competition in the market it has become more difficult to make the numbers work without considering the subjective factors I described in this post.
Stay tuned for a full breakdown of how I analyze the numbers to put myself in the best position to maximize my ROI for my rental properties.