In the U.S., 35% of households live in rental properties, with the average asking rent among apartment listings nationwide being $2,016 per month. Thanks to rising house prices, higher lending and interest rates, and a generation of new adults who prefer freedom over roots, renting has become much more common in the last decade. Over half of U.S. households with children are millennials, and research shows they’re much more likely to rent than own a home.
This is excellent news if you’re looking at rental real estate as an investment strategy. With high demand for properties and rentals continuing to offer tremendous appreciation and cash flow, now is a fantastic time to get started in real estate. A lot relies, however, on your choice of property. Here are some factors to think about when choosing a rental property.
11 top features of a profitable rental property
When buying a rental property, it’s essential to look at it from different angles and through various metrics to determine its financial viability as a long-term asset. Here are some factors to consider when looking for a profitable rental property.
1. The size, condition, and age of the property
The state of the property is one of the most critical determinants of whether it will end up being a profitable real estate investment or not. Larger homes require more utilities and maintenance than smaller ones, though they can bring in higher rents. A property that needs significant repairs, such as a historical home, may be more valuable but more expensive to maintain, especially if you’re working with a property management company. A move-in-ready property can start bringing in cash flow right away, while a home that requires significant updates will have to sit empty for the duration of those renovations.
It is important to understand how all these factors play into your long-term goals when making a purchasing decision. In particular, you want to go beyond superficial appearances and do due diligence on any home before putting in an offer. You’ll want to look for leaks or water damage, check the windows and doors, hire someone to look through wiring and electrics, and ensure there aren’t any obvious signs of insects or rodents.
2. Cash flow and growth potential
As a real estate investor purchasing a rental property, there are two key financial questions to ask about a property:
- Will the value of the investment property grow over time? While purchase prices of homes can fluctuate yearly, the general trend has historically always been an upward curve. Still, it’s important to know which areas and properties are likely to significantly appreciate over time so you can maximize your return on investment. Look at the Freddie Mac House Price Index (FMHPI) to learn more about the monthly price inflation for houses by state and metropolitan statistical area (MSA).
- What is the estimated monthly cash flow from this property? How much rent will this property earn per month, and is it financially worth it, after factoring in the cost of repairs and refurbishments to get it into rentable condition? The 1% rule, which states that the monthly rent you collect should be at least 1% of the house’s value, is considered by many real estate investors to be a reliable measure of a profitable rental property.
3. The rental market
Certain cities, such as San Francisco and New York, have a high percentage of renter-occupied households, which makes them more likely to have a profitable rental housing market. Beyond just cities, it’s also essential to look at individual neighborhoods. Areas where home prices, and therefore rents, are more affordable can sometimes have more renters, especially long-term tenants with families. When visiting a neighborhood, keep your eyes on how many homes are available to rent. Too many “For Rent” signs could point to high vacancy rates, indicating that rent prices are too high or that owners face difficulties finding qualified tenants.
4. The neighborhood
In addition to the house and its profitability, you want to look at the neighborhood when considering purchasing a property. Is this an area with many single-family homes or multi-family apartments where you’re likely to have families as long-term tenants? Or is it close to a college or university with a higher turnover? You can get away with doing the place cheaply in college towns, with less expensive furnishings.
If you’re renting out to families, however, the safety of a neighborhood will be of paramount importance. Crime rates are something renters will look at when evaluating a potential residence, which means it’s something you need to look at, too. Also, look for foreclosures in the area. Neighborhoods with foreclosed homes tend to see an increase in property tax rates and a significant decline in the property value of neighboring properties. RealtyTrac data shows that neighboring home values drop 1% for every 7% drop in the foreclosed home value.
5. Proximity to schools
Being close to high-rated schools is a good determinant of the profitability of a rental property. Families want to be near educational facilities, which can decide whether a family moves into a home or not. Check out the area’s closest elementary, middle, and high schools, and look into their rankings through websites such as GreatSchools.org. Parents are unlikely to move into neighborhoods or areas that lack quality schools and educational centers, even if they’re perfect in every other way.
6. Local amenities
In addition to the neighborhood being safe and close to high-rated schools, the physical and social amenities around a rental property can make it highly desirable to renters and, therefore, incredibly profitable for you. When checking out a property, you want to look for nearby shopping malls, dining and entertainment venues, parks, gyms, swimming pools, movie theaters, medical facilities, and local shops. The more there is to do in a community, the more likely it is that renters, particularly families, are enticed into moving there. Convenient access to public transit and shorter commute times is also a plus. Does the area have a good network of roads? Are there potholes and easily flooded areas? Are the streets well-lit at night?
Again, any question a renter would ask is a question that will impact the potential profitability of your property and is something you need to think about as well.
7. Local economy
The state of a local economy can either attract or repel potential renters. You want to invest in homes in areas where businesses are expanding, median household incomes are growing, and more people are looking to relocate. The strength of the local economy can determine not only the demand for a rental property but how much people are willing to pay and for how long they’ll stay. Long-term tenants are great for rental property because not only do you not have to deal with the hassle—and expense—of finding new tenants, but it also ensures higher occupancy rates, ultimately benefiting your bottom line.
8. The job market
Cities and towns with growing employment opportunities attract more residents and tenants. A healthy local job market indicates several factors we’ve already discussed—a growing local economy, a robust real estate market, and the availability of and access to local amenities. Plus, more people working in a town and city means population growth and more potential tenants for rental real estate properties.
9. Property taxes
To profit from your rental property, you’ll need to be very clear about the operating expenses it will incur. Purchasing a property only to have it bleed money regularly is a surefire way to lose out on the cash flow and passive income that makes owning rental property so appealing. Property tax is one of the most significant expenses you’ll need to factor in. High property taxes can turn an otherwise excellent rental property into a lousy investment.
Property taxes ultimately come down to the property’s size and location. Cities and metropolitan areas tend to have higher taxes, while rural areas can be lower. Property taxes tend to vary widely from county to county and state to state. You also want to consider whether taxes for property investors are higher than for owner-occupied properties and whether there are potential property tax hikes proposed for the future. Talk to real estate agents and homeowners in the community or look through the municipality’s assessment office records for this information.
10. Climate and weather
Suppose a rental property is in a town or city prone to flooding, hurricanes, blizzards, earthquakes, or wildfires. In that case, this is likely to impact both the desirability of the location and your costs of insuring and maintaining the house. There may also be the additional expense of weather-proofing a home or building.
With an increasing number of people working from home post-pandemic, many families are relocating to larger homes in smaller towns and cities with milder weather conditions, which will also impact the demand for homes in those areas.
Like taxes, property insurance can significantly increase your costs and lower your profits, so this is something to keep in mind when considering the purchase of a property. Will your property have higher insurance costs due to vulnerability to natural calamities? Could there be fundamental or structural damage to your home? Have there been any evacuations in the area in the last few months or years?
11. Future development
Finally, knowing what’s coming up in the future is essential. By understanding what’s coming down the pike, you can make more informed decisions about the market value of your real estate purchase and the rental income you can expect to receive. For instance, new schools or shopping centers getting the go-ahead for construction tells you that there’s money being put into the economy, that this will attract more investment, and that new residents will want to move to take advantage of these new developments. Likewise, shops closing, schools being relocated elsewhere, and projects not being given the green light can also tell you a bit about a place’s short-term potential—or lack thereof.
Ready to invest in rental properties?
Rental property investing can be incredibly lucrative. And if you’re smart in choosing a profitable rental property, you could cover the monthly mortgage and property expenses with the rent payment, thereby paying for the investment even as it grows.
At Arrived, we’re experts at picking out excellent rental properties in profitable locations. If you’re ready to get started in rental real estate but don’t know where to start, our platform will let you purchase shares of rental properties and get a portion of the rent without effort. Browse our available properties to begin investing in real estate today.