How Do I Pick a Profitable Rental Property?

• A Short-term Airbnb type of rental
• A Long-term traditional rental for a single-family home
• An ADU for an existing piece of property
• A Multi-family rental, renting out the main house and basement

• Growth potential
• Low crime rates
• Low vacancy rates

• Property taxes
• Closing costs
• Maintenance fees

Choosing the right neighborhood

• Growth potential. You shouldn’t be focusing solely on areas that are in high demand now, but instead should discern areas that will be in high demand in the future. Looking for these areas of growth are key to making a great return on investment, with appreciation playing a huge factor. Key signs of an area that are destined for growth include new jobs, new amenities, an up and coming school district, and more. People will flock to areas where there is a potential to make money and raise a family.

• Crime rates. Areas with high-crime typically welcome issues that are financially burdensome on a rental property. The chances of actual vandalism to the house is an immediate concern, but also high-crime areas are notorious for having higher vacancy turnover rates. This means that you have a higher possibility of sitting on a vacant property, where you lose money by simply not having renters. You can find local crime rates by searching by county online.

• Vacancy rates. You’ll want to focus on buying a property in an area that has low vacancy rates and a few listings. This signals that the area is in high demand and that people are wanting to move there. Future renters may be willing to compromise their wishlist or budget to live in the desired area, making it easier for you to attract renters to your property. This is also a great benefit to landlords when it comes to rent prices. You’ll typically be able to charge more when a property is in higher demand, increasing the chances of higher profit margins.

• Property taxes. Property taxes play a huge role when determining the monthly cost of a home. Property taxes vary based on the assessed value of your home (typically lower than market value) multiplied by the current property tax rate of your area. To determine the assessed value of your home and the current property tax rate you can find that information online with a simple google search. As you house hunt, keep in mind the benefits of buying a house in an area with lower taxes—it may only be a few minutes away from your desired location, but it could save you thousands of dollars a year that could otherwise be avoided. Include property taxes in your cost of investment total.

• Closing Costs. There is a lot of emphasis on having enough money for a down payment, but oftentimes the expenses of closing costs are overlooked. Closing costs cover the work, time, and money that goes into selling and buying a house, costing anywhere from 1%-5% of the home’s value. This is an added cost that can sometimes be negotiated with the seller. If the seller is needing to get out of the house quickly and it’s a competitive seller’s market, they might incentive a buyer to buy their house by covering some of the closing costs. Either way, make sure to factor in closing costs to the overall cost of your investment.

• Maintenance fees. As a general rule, you can expect to spend at least 1% of the home’s value on annual maintenance fees. Factor in maintenance costs into the overall investment cost of your home. Second, get an estimate of potential large costs that you could potentially face if you own the home for a long period of time. Ask your home inspector what the lifespan is of the large items in your home such as the appliances, air conditioning unit, roof, and more. Understanding the remaining lifespan on these items can help you anticipate if you’ll need to budget for these future costs or not.

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