How to Spot a GREAT Investment Property

Investing in rental property can provide excellent returns if you know how to identify ideal properties with strong appreciation potential. Follow these tips when evaluating potential real estate investments to pick winners.

 

Research the Local Real Estate Market Thoroughly

Conduct in-depth research on the city and neighborhood to identify promising markets:

● Review historical population and job growth data for the greater metro area. Also, study projections for continued growth. Areas attracting new residents and companies tend to see rising housing demand.

● Look at trends in home values and rents over the past 10-15 years. Seek markets where average rents have been rising steadily over time, outpacing the rate of home price appreciation. This dynamic indicates there is room for rents to grow.

● Talk to several local real estate agents to assess investor demand. Look for a market with consistent demand for rentals year-over-year but less competition from investors snapping up all the inventory.

● Physically drive around target neighborhoods to observe development patterns first-hand. Signs of private and public reinvestment—new construction, rehabs, improved commercial district—are positive indicators.

Crunch the Numbers Carefully

Dig into the property's expenses, rents, and price to confirm favorable prospects:

● Research current market rate rents for comparable properties. Focus on rentals with similar square footage and number of bedrooms. Drive around to spot "for rent" signs with listed prices.

● Factor in all projected operating expenses - property taxes, insurance, expected repairs and maintenance, potential vacancies. Build in a cushion since unexpected costs always arise.

● Make sure the "1% rule" applies – the projected monthly rent exceeds 1% of the total purchase price. This helps produce positive cash flow. The higher the ratio, the better.

● Consult an investment property calculator to estimate projected appreciation, rents, and expenses over 5-10 years. Look for significant positive cash-on-cash returns.

Inspect the Property Thoroughly Yourself

Assess the current condition and likely improvement costs:

● Does the exterior appear structurally sound with a newer roof, quality windows, and no visible foundation cracks or water damage?

● How updated are the finishes, fixtures, kitchen, bathrooms, flooring, and appliances? Cosmetic remodels can allow higher rents.

● Confirm all appliances and systems work – plumbing, electric, HVAC, water heater. Check for leaks, odd sounds, or inadequate cooling/heating.

● Does the property need additional safety, appeal, and functionality upgrades – flooring, lighting, paint, and electrical panel?

 

Interview Current and Former Tenants If Possible

Ask those with first-hand rental experience:

● How long did they stay? Frequent turnover means more vacancies and remodeling between tenants, eating into profits. Try to determine why past tenants left.

● Were maintenance issues and repairs handled quickly and professionally? How was the overall management experience? Good property management is invaluable.

● Were utility bills reasonable and consistent throughout the year? Drafty, poorly insulated homes cost more for tenants to operate.

● Would they rent this property again? Feedback helps assess true appeal vs. just filling a temporary need.

Carefully Evaluate the Surrounding Neighborhood

The neighborhood itself impacts both rents and home value appreciation:

● Is the property conveniently located close to major employment centers, recreation, shopping, schools, and public transportation? Short commutes and amenities attract renters.

● Are the streets relatively quiet and safe? Walk around after business hours to observe the activity. Seek out peaceful areas away from high-traffic roads.

● Are surrounding properties well-maintained? Poorly maintained buildings and yards bring down a neighborhood's appeal.

● Is it a stable community comprising owner-occupied and long-term renter households? Areas with high turnover indicate transience.

Research Any Homeowners Association Rules

If part of a homeowner association, understand how HOA rules could impact your investment:

● Does the HOA limit the minimum or maximum rental period? Nightly vacation rentals may be prohibited, for example.

● Are exterior renovations or improvements subject to HOA design approval? Curb appeal projects add value.

● Are limits in place on how many rental units are allowed in the association? Some prohibit renting out rooms.

● How much are the recurring HOA fees? Include these costs when projecting expenses and cash flow.

Conclusion

Ideal investment property offers strong market dynamics, good physical condition with renovation potential, appeal to renters, and surrounding neighborhood with long-term appreciation potential. Conduct thorough due diligence on all these factors to avoid pitfalls and maximize your returns. Careful analysis helps spot great deals that can produce ongoing rental income and sizable profit when sold.