Top 12 Features Of A Profitable Rental Property

A great real estate investor knows how to determine a good rental property. First, know your customer. Then, find the product the customer wants to buy.

The most profitable rental properties include specific features and characteristics. This guide will describe the conditions to seek out when buying a property for rent. It will help you understand what to look for in a rental property and find the most profitable rental properties.

#1 The Property Financials

To determine if a rental property is profitable you need to assess the property’s performance. Whether you are interested in monthly cash flow, annual cash return, or cap rate you need to know how the property performs. I included here some basic rules to help you understand

• The 1% Rule – The 1% rule is a great way to quickly toss out properties which are unlikely to be profitable. The 1% rule simply means the monthly rent will equal at least 1% of your all in investment. For example, if buying or buying and rehabbing a property cost you $125,000, the monthly rent should be at least $1,250, or 1%. Properties that fall below this threshold are unlikely to be profitable investments.
• Understanding Cap Rate – Cap rate is short for capitalization rate. The cap rate is the annual income minus the annual operating expenses excluding debt repayment and income taxes divided by the all-in price (your purchase price plus rehab costs to make the property rent ready). This is expressed as a percentage. Class C or Class D properties will typically have a higher cap rate than Class A or Class B properties.
• Cash Return Rate – This metric means what it sounds like it means and is a measure of cash flow and return on equity. To find this value divide the annual cash return after paying all expenses except income taxes and depreciation and divide that number by the amount of cash is trapped in the deal. This will give you a percentage. 15% is a pretty great number. In time, you would have your cash returned to you after 80 months.

#2 Neighborhood

Another one of the important things to look for in a good rental property is the neighborhood. Evaluate whether the appearance of the neighborhood compared to other nearby neighborhoods. What you are looking for is indications of pride of ownership in the homes there. Look for the following:

• Homes are receiving improvements
• The yards are kept up and look good
• Yards, garages, and sidewalks are not littered with people’s personal possessions
• People are outside enjoying the neighborhood

#3 Crime Statistics

Nobody wants to live in an area where they will be concerned about becoming a crime victim. The most profitable rental properties are located in the low crime rate neighborhoods.

There are a lot of websites which can provide you with crime rate information. Additionally, the local law enforcement departments can give you good information about crime rates.

Additionally, homes in low crime rate areas typically sell at a premium compared to other homes. If the home you are considering has a current value of ARV (after repair value) that will be above average for the larger area or other neighborhoods in the area, you are likely already looking in a low crime rate area.

#4 The Importance of Education

Just as everyone wants low crime rates they want good schools, too. The school rating is a factor into what makes a good investment property.

Many states have come a long way with making school performance data available online. I encourage you to explore your state’s Department of Education website for school quality data. Focus on how the schools have performed on recent performance measurements.

Another factor that makes a good investment property is that the school is relatively nearby. A low commute time to the school will make the property more desirable to renters and increase your rent rates.

#5 Property Taxes

The most profitable rental properties have low property taxes. You need to consider property taxes because this is an expense which will never go away.

Try to avoid areas with higher property taxes if areas with lower property taxes are nearby. Also, as more states have capped property tax rates, be aware of the loopholes local governments can use to increase the taxes. The most common is a voter approved referendum. These are most often related to school or infrastructure improvements.

#6 Area Amenities

What to look for in a rental house includes knowing about amenities. Nearby amenities can drastically increase the rent rate at your property. You want to focus on nearby amenities desired by tenants. I would consider a 10 minute walk or drive as being nearby. Here is a list of the best amenities to improve the rentability and rent you can charge for your property:

• Dog parks (if you allow pets)
• Restaurants, bistros, pubs, or bars
• Parks
• Gyms
• Nice convenience store or drugstore
• Grocery store
• Medical care

#7 Nice Bathrooms And Good Plumbing

No one likes the smell of dirty water, poor drainage, or leaky pipes. One of the ways to have a more profitable rental property is to have a nice kitchen, good bathrooms, and good drainage. Plumbing should be in good repair with proper drainage.

Things to look out for include that all plumbing fixtures are working properly. Water drains at a good rate. Also, open under sink cabinets to look for leaks. Run some water while looking under the sink. Or, look for damage in the cabinet from water leaks.

#8 Favorable Climate

A rental property in a more temperate climate can be more profitable. Areas with large weather and temperature extremes require more maintenance. Weather takes an incredible toll on the life expectancy on the systems in a home. This includes roofs, siding, and heating and air conditioning equipment.

Save yourself money by buying rental real estate properties in areas with a temperate climate and fewer extremes. This will make your investment more profitable.

#9 Natural Disaster Rating and Protection

You can have a more profitable rental property by purchasing one in an area with a low risk of natural disasters. Properties in areas with a high risk of natural disasters including forest fires, hurricanes, and flooding are more costly to insure. Buying homes in areas without these possible risks will be cheaper to insure.

Additionally, disasters are an interruption to your business. So long as a home is in a state of disrepair from a disaster it can not be earning any income.

#10 Adequate Transport Facilities

A profitable rental property is located near transport facilities. Transport facilities include a wide range of possibilities.

First, a good road system with access to major thoroughfares, highways, and interstates. Renters need access to jobs and roads is what takes them to those jobs. Other transportation methods are important, too. Proximity to the following will make for more profitable property:

• Good road network
• Public transportation including busses, cabs, of riding sharing services
• Long range commuter transportation like interstates and a commuter rail line

#11 Job Market

What makes a good rental property is a good job market. Renters need jobs to pay the rent. So, if you want a more profitable rental property purchase one with access to quality job markets. You should be looking at the local economy.

Purchase a rental property in an area with an expanding, growing economy. A good sign of this is new development, new locally owned businesses, and recent additions of large businesses.

Evaluating the minimum wage could be useful, too. Areas with higher statutory minimum wages indicates tenants may have more resources to pay rent.

A diverse local economy is a good feature, too. Local economies overly dependent on a single employer or industry are risky. If that industry or business falters the local economy could gear down steeply and quickly. Not only could renters have less to pay rent but the property’s value will likely decline, too.

#12 Future Development

Ongoing development is always a good sign the home you are buying will be a profitable rental property. The price you buy the home is fixed. Ongoing development in the area means more jobs, more people, more demand, and more money.

Ongoing development should include a healthy mix of residential and commercial properties. You want to see more people of means coming into the community. This occurs by adding more of the right developments including businesses and jobs.

The Bottom Line: Hire a Pro

It’s not too difficult to find a profitable rental property. It just takes knowing what renters are always looking for. The more of that you have the more they will be willing to pay for the property.

The real estate agents on the Quadwalls Real Estate Team have helped real estate investors purchase the right rental properties. If you are intending to start purchasing rental real estate in Northwest Indiana let us help you.

Take the first step by completing the Quadwalls HomeFinder Assistant. It only takes 3 minutes to complete, and you can tell us all about what you are hoping to find. Then, we will get started helping you find profitable rental real estate in Northwest Indiana.