Distinguishing A Good Rental Property Investment From A Bad One

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Distinguishing A Good Rental Property Investment From A Bad One

Whereas a favorable rental property investment can rake in copious amounts of passive income, a poor property investment stands to bleed you dry financially. As such, it’s important to understand the differences between sound investment opportunities and ones you should walk away from. Unfortunately, many first-time investors fail to do their homework and wind up saddled with properties that are unable to generate a profit. So, if you’re looking for effective ways to distinguish good rental property investments from bad ones, consider the following measures.  

Educate Yourself On The Local Real Estate Market 

Not every good property necessarily represents a good investment. For example, if a seemingly desirable property is located in an area with low home prices, low rental rates, slow growth and high crime, it may not be able to generate the desired profit. This is where the real estate mantra “Location, location, location” truly comes into play. 

If a property is located in an undesirable area, it may not be a sound investment. So, in determining whether a property is a worthwhile investment, you’ll need to research the area in which it’s located. Areas that are densely populated, constantly expanding and financially strong tend to command higher rents and property values than areas with low median income, concerning crime rates and little growth potential. When conducting your research, pay special attention to rents and home prices and determine whether local real estate is a buyers market vs. sellers market.  

Ascertain Why The Current Owner Is Looking To Sell 

If a rental property appears to be well-managed, well-maintained and consistently profitable, you may understandably want to avoid looking a gift horse in the mouth. However, it’s always worth asking why the owner is looking to sell. 

Of course, this isn’t to say that you should enter negotiations with the seller from a place of mistrust. Instead of giving the seller the third degree, you’d do well to politely make this inquiry at the outset. If the seller appears cagey or outright offended by the question, don’t press the matter. With any luck, a good property inspection will be able to turn up any problems the seller is attempting to hide. Which leads us to our next point…    

Call in a Certified Home Inspector 

A certified home inspector should be tasked with thoroughly looking over any rental property you’re thinking about purchasing. Even if a property appears to be well-maintained and bereft of any noteworthy issues, a dependable home inspector can provide invaluable clarification and make you aware of any problems with a property’s structural integrity, electrical setup or plumbing. Needless to say, learning about such issues before committing to invest in a property can be a tremendous boon to both your finances and mental health.

As an added bonus, a home inspector’s findings can dramatically increase your overall bargaining power. For example, if they discover any issues of which even the seller was unaware, you’ll be justified in requesting that the cost of fixing those problems be deducted from the asking price.  

Weigh Renovation Costs Against Long-Term Profitability 

Almost any rental property you stumble upon is going to require repairs and/or renovations. In many cases, repairs/renovations are mild to moderate and shouldn’t prove too draining on your finances. Conversely, properties that require extensive repairs/renovations don’t always make the best long-term investments. After all, the collective cost of doing the necessary work may exceed how much money you stand to make off a property. This is among the reasons you should always get estimates from contractors before proceeding to invest in a property that requires work.   

If a property qualifies as a fixer-upper, you should probably avoid making it your first rental investment. In all likelihood, you lack the experience to oversee such a project, and undertaking something like this on a whim is practically guaranteed to have serious financial repercussions. 

Assuming that every rental property investment will generate a considerable profit is unlikely to serve any soon-to-be-landlord well. There are a variety of factors that go into determining a rental property’s overall profitability – some of which are largely out of your hands. So, before committing to purchase your first rental property, take care to familiarize yourself with the tenets of a desirable property. Luckily, the measures discussed above should prove extremely helpful in this endeavor.