If you’re looking for a long-term and profitable investment, buying an investment property to rent may be a great solution for you. Investing in real estate is both exciting and rewarding but only if you make the right choice, that's why investing in rental properties for beginners can be both daunting and financially risky.
Let’s discuss the top features you should be looking for in your rental property to ensure great returns and a stable investment.
The real estate business can be daunting to enter given the large upfront investment required, it can also be one of the best ways to build long term wealth. When looking for your rental property it is important that you understand what makes a rental property profitable and how to avoid an unprofitable rental property.
Investing in real estate is a proven, tried, and tested idea. Many investors have built their fortunes through property investing alone. Anyone can achieve financial success through property investment, but it takes knowledge to make the right decisions, courage to invest large amounts, and patience to wait for your investment to grow.
It might not make you a millionaire overnight, but it certainly can make you one in a few years if you invest in the right properties. Our guide below to ‘owning rental property for dummies’ will educate you about the choice of property, what to look for, and what to reject.
Luckily for you, we have done the research for you and listed below the top factors that make a rental property profitable.
- Location, location, location - yes it’s relevant, understand your neighbourhood and who it attracts.
- Education matters, at least to the families applying to rent your property.
- Lifestyle is important, how liveable is the area? How will the external area and the property improve the day to day lifestyle of your tenant?
- Know the area’s vacancy rate, this may be your biggest out of pocket expense.
- Research rental prices, is this investment financially sensible and will there be monthly out of pocket expenses?
What to look for while buying an investment property to rent.
Location, Location, Location
The neighbourhood your rental property is located in will ultimately have the biggest impact on your rental income, you need tenants to make a profit on your investment. Better suburbs tend to attract more desirable tenants as well as more tenant applications, meaning you get to choose the best tenant for your property.
You must also look at the type of tenant that the area is likely to attract, for example, if your investment property is located near a university, you’re more likely to receive applications from uni students versus if your rental property is located near a primary school which will have more working class families applying. The latter tends to make higher returns.
Another factor is work, where are people working in the area? A large employer within easy access of your property will provide a good source of tenants. Again, the nature of the work place will determine the demographic of the tenant.
So what makes a good neighbourhood? A good neighbourhood has a low crime rate as well as a low vacancy rate. It should have further plans for growth and development such as shopping centres, schools, public transport, restaurants and commercial businesses.
While looking for owning a rental property for investment, you need to look for the schooling opportunity around the area. Public schools are one of the primary elements that families look for while renting a property.
Because schools have districts that determine eligibility to attend, a rental property that is in a quality school district will be highly sought after by working class families.
Also schools differ, so there may be a school that actively attracts different cultures or demographics.
If you have a property with an excellent school nearby, you will likely receive a high number of quality tenant applications and have minimal vacancy periods; this means you can charge a premium rent for your investment and maximise rental yield.
There are two kinds of amenities that tenants look for while renting a property: Internal amenities and External amenities. Both are extremely important to a tenants lifestyle and must be considered while buying an investment property to rent.
While looking for an appropriate and profitable rental property, consider the type of amenities that improve the day to day life of your potential tenants. Homes with the following amenities will usually receive more applications;
- New or newly renovated kitchen and bathrooms
- Lock up garage, preferably a double
- Built in Robes
- Ducted or reverse cycle air conditioning
- Wooden floors
Tenants usually check out all these internal facilities before signing an agreement. Ensuring all of these are available improves your probability of finding suitable long-term tenants and also giving you the best applicants.
Take a tour of your prospective neighbourhood, are there amenities nearby that offer convenience and entertainment? Shopping centres, restaurants, cafes, gyms and recreational parks within a short distance all add value to your tenants lives.
Generally, rents are higher for properties in areas with external amenities available close by. People are increasingly becoming health conscious and seek options to access a park to walk, a gym to join, a convenience store for the morning rush, a café for breakfast, and some shops around the vicinity. If you invest in a rental property with such amenities, it is more likely to receive a positive rental yield and lower rate of vacancy.
Since COVID-19 another major factor has become space, both internally and externally. So having somewhere to work from home while also being able to sit outside. Being close to the beach, parks, hikes and trails with fresh air and light are now important considerations.
Estimated Rental Value
You need to know how much rent your property can generate, you can estimate this by looking at similar rental properties in the area you wish to buy. The rental income grows at a steady pace with passing years if the area’s economic conditions improve. Therefore, to earn a sustainable income monthly, invest in a lucrative location.
You should also ensure that you have enough saved for the deposit as well as an emergency fund, if you risk your entire savings on a deposit, any unexpected costs or unusual vacancy periods could cost you your investment. Added expenditures because of the unforeseen situation that can compromise your rental income for some time. To be on the safer side, you need to keep a cushion for such circumstances so your mortgage repayments don’t suffer.
For the mortgage repayments, the rental value should be high enough to cover the full repayment without you chipping in. The rental yield is a valuable addition to your property equity growth. Another tip is to have at least a months mortgage payment in the off-set account. If you are relying on the rent to come exactly on time for the mortgage repayment, you will just end up being stressed and frustrated. Tenants do not always pay exactly on time so give yourself a buffer.
Before buying an investment property on rent, you need to find out the area’s vacancy rate as this is going to have the biggest impact on your earnings, and may be your biggest out of pocket expense.
A higher turnover of tenants simply means that either it is seasonal or due to the lower market value. Seasonal change in vacancy rates is subject to the time of the year when people usually shift due to any reason. It has almost nothing to do with your property.
However, if there is a constant higher vacancy rate and more listings of vacant properties during odd times of the year, then it means properties in that area are not marketable or profitable. Investing in such a place out of desperation or lower acquisition cost would put you in trouble. You are investing in building your wealth, which is impossible with investing in a higher vacancy rate area.
Check out SQM Research to find out vacancy rates by postcode.
Typically, certain times of the year have more demand than others. For example, the Christmas holidays are not a good time to have a vacancy, therefore make sure your lease does not end in December. Late January and February the university students are looking for properties, even if you property is not suitable for students, the demand is higher at that time and makes leasing easier.
Are you a Landlord?
A very important question to ask yourself is, “Are you a landlord?” Investing in a rental property is an extremely easy task compared to managing and maintaining it.
You might have the money to pay the deposit to a bank and purchase the property, but make sure to have some extra cash to cover the unexpected maintenance issues that will invariably arise.
It also takes real energy and skills to maintain a rental property without an issue. You need to develop connections with maintenance staff such as electricians, plumbers, A/C specialists, insurance companies, tax accountants and other related experts.
If you think you don’t have the time for this, you definitely need a reliable property manager who can do all these chores for you. To learn how to choose a reliable property manager for your rental property check out our last blog.
- Effectively advertise the property to find both the maximum number of tenant applications as well as quality tenants that will respect your property.
- Positioning your properties rent at an appropriate market level, this will help to increase tenant applications whilst ensuring you get the highest possible return.
- Screening applicants and checking references.
- Produce a lease that protects your interests and investment whilst remaining fair to the tenant and also complies with all local and state regulations.
- Handling of repairs and maintenance.
- Keeping on top of ever changing legislations.
- Monitor and accurate recording of rent receipts.
- Excellent communication and negotiation skills
- Attention to detail.
At KingsCoin we believe in empowering you to greater wealth through property to create your own family legacy.