When it comes to investing in real estate, many of the same principles apply as when you’re buying a primary residence. Things like location, the local job market, and quality of schools all play a role in selecting where you might want to live, as well as where you may want to invest.
If you’ve had a great experience investing in your own home, investing in a rental property can expand those benefits further. For one, it gives you the opportunity to diversify your real estate investment because you get a chance to invest in a location that’s different from your own neighborhood. Or, if you like your neighborhood, you get the chance to augment your returns. You also get added tax benefits, and not to mention, a consistent monthly income stream.
A licensed real estate agent can provide the latest information about the best up and coming opportunities in a given market, so we always recommend enlisting the help of an agent even if you’re just starting to think about an investment property. In addition to consulting with a professional, here are some other key things to consider when deciding on a residential real estate investment.
- Location, Location, Location
It goes without saying that location is the defining factor when it comes to real estate investing, and there are a number of variables that make one location favorable to another.
For one, consider how long you intend to hold on to the investment and what the relative prospects are for the area you plan to invest in, given your time period. For example, a neighborhood that may have had a high crime rate in the past could be undergoing a metamorphosis with new investment that’s bringing jobs and other opportunities to the area, which is helping to lower the crime rate.
Other factors that impact how suitable a location can be for real estates include public transportation, access to shopping and medical centers, and also the quality of local schools.
Think about your ideal renter and consider whether a certain property would meet their needs. For example, a college town might have a high turnover of renters, but you’re guaranteed to get an influx of new potential tenants every year. A town with a burgeoning economy may attract young families, while another town may be attractive to retirees or vacationers.
You’ll want to become familiar with the locals laws, such as whether or not there is rent control, zoning restrictions if you plan to remodel, and also what the property tax rate is.
2. Future Development in the Area
You definitely want to consider the trends and future development prospects for the area you’re looking to invest in. For example, are there zoning controls for building heights, or what types of properties are allowed for new developments? Will an area remain 100 percent residential or could be it become more commercial? Would commercial growth be a positive or a negative?
Investopedia recommends contacting the local municipal planning department in a given area, which will have information on up and coming developments, as well as zoning restrictions. New developments could increase the value of the property you’re investing in or they could hurt it, so it’s good to know what’s coming down the road.
3. The Potential Return on Your Money
There are an unlimited number of ways you can invest your money, so you’ll want to weigh the potential returns from a given investment property with the amount of work involved before deciding to take this path.
A fixer upper in an up and coming neighborhood may present a great investment opportunity, but you’ll need to factor in the costs and time to remodel. The length of time a remodel takes is a period that you’ll most likely will not be collecting rent. In addition, consider how much of your own time you can you devote to the project.
You’ll also want to think about how soon you’ll want a return, and where the market might be at the time you want to sell. Some investors want to get a small return every month, above what they’re paying on the mortgage, while others are willing to take a small monthly hit in exchange for the prospect of selling down the road.
- Ongoing Maintenance and Other Costs
You’ll want to factor in all costs, including emergency repair costs, that can impact the return on your investment. In addition to property taxes, consider costs such as average vacancy rates when you’ll have a mortgage payment to make, but you won’t have rent coming in, or special assessments if you’re investing in a condominium.
The real estate site Auction.com reminds new real estate investors to consider whether they need a positive cash flow coming in every month or if they’re prepared to pay extra to cover costs that monthly rental payments don’t.
In addition, consider the price of ongoing maintenance. Vacation rentals or rentals in college towns might require more ongoing maintenance and upkeep. Other locations may require you to keep a yard maintained, which you don’t want to leave up to your tenants.
- The Local Competition
Be sure to follow the rental market in the area where you plan to invest. The length of time that rentals stay open and the number of available rentals can impact how easy it is for you to rent your place. In addition, you’ll want to benchmark against comparable rents to get a realistic idea of what you might be able to charge. Furthermore, check out what kind of amenities that other rentals offer, such as fenced yards, parking, and in-unit laundry facilities.
6. Quality of Public Schools
As mentioned earlier, if your potential tenants might have children, investing in an area known for the quality of its schools could be the difference between making a great investment or a poor one.
7. Crime Rates
The local police department can provide valuable information on crimes rates, as well as past and future trends. As mentioned earlier, neighborhoods do change and what might have been considered a less desirable area five years ago, could be an up and coming area with less crime today.
8. Job Prospects
Access to jobs is a defining variable for real estate, as we see clearly in the Bay Area. While the Bay Area is a beautiful place with great weather, the reason real estate is so expensive is that the Bay Area offers plenty of high-paying jobs.
Unless you’re considering a vacation rental, local job opportunities and future job prospects are a key aspect to deciding where to invest in a real estate property.
Consult the U.S. Bureau of Labor Statistics website to get data for the area you’re considering. In addition, the real estate sections of local newspapers can be a treasure trove of information about the local market, prices, and new development in the area.
We have a finite amount of land with a population that is growing, so investing in residential real estate can offer unparalleled returns if you take the time to understand the local market and upcoming trends.
Make the Best Decision for Your Real Estate Investment by Partnering with the Local Experts
Many variables come into play when it comes to making a great real estate investment decision. This is why partnering with a local expert can make the difference between a great decision that delivers substantial returns and one that doesn’t.