What to Look for in Investment Property

Buying a piece of real estate as an investment property can be tricky. It can also be quite lucrative. Today more than ever, the rental market is booming. Increasing student debts have pushed back the median age of the first-time homebuyer. With inventory consistently low, many people who would have bought a home in other market conditions are deciding to rent, instead. If you are interested in buying a home to rent out, consider these factors:

Numbers. The most important aspect of investment property is profitability. It’s important to gauge profitability more on current performance as opposed to future predictions. In other words, if a property generates little income now but the area is “expected to appreciate,” it may not be your safest option. The ideal income property will offer appreciation value and cash flow. It’s better to use growth potential as a differentiating factor between areas that offer similar cash flow rather than a leading indicator. Does the neighborhood plan to build parks, malls, gyms, etc? This is not only important because it is a sign of growth, it also signifies growing employment opportunities (and thus a larger pool of tenants!).

Be weary of places with prices that are too good to be true—cheap properties are often accompanied by a high number of risks and problems. Look for something that is listed for a price similar to market value or above. You’ll also want to consider property taxes and rate of return, or “cap rate.” Research market conditions before you determine what a “good” cap rate is; this number continuously fluctuates.

Source. Be cautious of homes that have sat on the market for a long period of time. This is rather unique in today’s market, and there may be a good reason no one has yet bought that property. Likewise, a reduction in price may be a red flag.

Location. Considering price-to-rent ratios, you will want to avoid buying a rental property in a city’s nicest location. Aim more for average-priced neighborhoods, but remember that your tenants will reflect the quality of the neighborhood in which you buy. Homes in reputable school districts with low crime rates tend to hold value over time. Also consider vacancy rates and average income.

Condition. Ali Boone, an author of Bigger Pockets, advises that investors buy turnkey properties. At the very least, hire a home inspector to examine the actual condition of any property before you buy it.