For a new investor, buying real estate may seem daunting. The real estate market is a difficult one, and it’s full of landmines which can destroy your return. Doing detailed research is important before diving in to ensure you are aware of the pros and cons. Before you buy, consider these 10 factors to help you find the best income property.
Ten factors to consider when buying an income property
1. Neighborhood
Your vacancy rate and the type of tenants that you attract will be determined by the neighborhood where you purchase. If you purchase near a college, students are likely to be the majority of your potential tenants. Every summer, you may struggle to fill vacant properties.
Some towns discourage the conversion of rental properties by charging exorbitant fees for permits and adding red tape.
2. Property Taxes
Property tax varies widely depending on the area you are targeting. While high property taxes may not be a problem in an attractive neighborhood that has long-term tenants, there are also unattractive locations with high taxes.
You can also ask homeowners about their tax situation. Find out if there are any plans for property tax increases in the near term. In a town that is in financial trouble, taxes may be raised far above what a renter can charge.
3. School
If you are dealing with a family-sized home, consider the quality of schools in your area. The monthly cash flow is what you’ll focus on, but the value of your property when it comes time to sell will also be important. If there aren’t any good schools in the area, it can have a negative impact on your investment.
4. Crime Levels
Nobody wants to live near a crime hotspot. The local police and public library, as well as state and municipal websites, should provide accurate statistics on crime in your neighborhood. Check out the vandalism, serious crimes and minor crimes. Criminal activity may be increasing or decreasing.
5. Job Market
Locations that offer more employment opportunities tend to attract more tenants. Consult the U.S. Bureau of Labor Statistics or a local library can provide you with information about the job availability in a particular area.
If you see an advertisement about a large company moving to the area, then you can be certain that workers looking for a place will be interested in renting. However, the type of company may affect housing prices. Renters will probably not mind if the business is in their area if you do.
6. Amenities
You can find promotional literature at City Hall that will give you an idea of where the best mix of public and private property is. City Hall might have marketing literature that will give you an idea where to find the best combination of public amenities with private property.
7. Future Development
Municipal planning departments will have details on any developments or plans already zoned in the area. Construction is a good sign, but beware of new developments which could affect the value of nearby properties. Your property could be in competition with other properties.
8. Listings and Vacancies
If there are unusually large numbers of listings, it could be a sign that the neighborhood is in decline or a seasonal cycle. Discover which one it is. In either case, high vacancy rates force landowners lower their rents in order to attract tenants. Low vacancy rate allows landlords to increase rents.
9. Rent Averages
Make sure the property you are considering can generate enough rental income to cover all your expenses, including taxes and mortgage payments.
It is important to research the area in order to determine where it will be heading within the next five-years. A property that is affordable today may mean bankruptcy in the future if taxes are set to rise.
10. Natural Disasters
You’ll need to deduct insurance costs from your returns, so it’s important to know how much they’ll cost. If you live in an earthquake-prone or flood-prone area, insurance costs can eat into your rental income.
