When diving into the world of rental property the first step is to determine the price line you want to work with. Homes in higher priced neighborhoods will increase the probability of attracting financially secure, long-term tenants meaning lower turn-over, less time the property sits vacant and lower renovation costs. But higher priced homes may be beyond your planned price range. Even if the initial cost is within your budget, make sure you also evaluate the costs of property taxes (check with the local tax commissioner’s office), insurance, and what higher income tenants will expect in the way of repairs. Will your rental income cover your projected costs and allow a margin of profit? Keep in mind the resale value of a higher end home when calculating your potential profit. If you are looking for a short-term investment, resale value is an important consideration.
If lower priced neighborhoods are more in line with your initial budget, evaluate the long-term costs and the resale potential. The initial cost can be lower in depressed neighborhoods. Renovation costs will be cheaper as you can use lower-end product, and taxes (if you shop carefully) can be significantly lower. But working with lower income tenants comes with its own risks. You will face more eviction costs and higher turn-over costs with tenants who often live paycheck to paycheck. When the time comes to sell your property, you may be shocked by the lower value of the property due to the lack of care given by higher turnover tenants. Compare the potential income derived during the time you rent the property with the likely cheaper, but on-going expenses. If you are in this for the long haul, a lower-end property may well be worth it.
If you have determined a higher end home is the best choice for you, the next step is to find a home that will attract a stable, long-term tenant. For many higher income prospects, the biggest issue will be the local school district. Check online for local school ratings to narrow the neighborhood you choose. Second, check commute routes, especially in metro areas. Is the neighborhood close to interstates? Is access to downtown areas snarled with traffic on a regular basis, or is traffic flow relatively easy? Third, what amenities does the neighborhood offer? Is there a park nearby? How about an upscale shopping mall? Gyms? While these are not required, they can help when marketing the property. Fourth, what is the crime rate in this area? Is the home close to low-end apartment complexes and busy intersections? Or is it in a well-defined neighborhood that has limited access for cut through drivers and foot traffic? How often do police respond to crime in this neighborhood? And fifth, what is the local picture on vacancies and current listings? If the neighborhood has a lot of vacancies, you will not be able to command a higher rent rate due to competition.
When choosing to buy in a lower income area, check for these issues: Is the house on the bus line? Is the neighborhood safe? (This can be checked by a visual inspection of the neighborhood, a call to the police department and checking on-line for crime statistics.) What do the surrounding houses look like? Are there burglar bars throughout the neighborhood? Lower income tenants have likely dealt with high crime in the past and will be looking for a safe neighborhood for their families. Again, check the vacancy rate so you don’t find yourself up against a lot of competition, thereby commanding a lower rental rate.
If you have decided to focus on low-end rentals, be aware that tenants will struggle to pay rent due to a myriad of issues. The most difficult times for lower income tenants are the beginning of the school year when children need new clothing and school supplies, and Christmas when the focus of income is on buying gifts. Consider giving a discount on rent in September if rent is paid on time for August and September and in January if December and January rents are paid on time.
Other struggles your low-income tenants may encounter include: unexpected medical expenses, car repairs and illnesses that keep tenants from working, thereby lowering their income. These are harder to prepare for. But you can establish a program where renters who pay on time for 12 months can get a partial month of free rent when needed. Your tenants will love you for it and you may be able to avoid an eviction filing and associated renovation costs.
Now before you go out there and evaluate properties there is one more thing to consider. Will you manage your own property or use a management company such as Compass Property Management Group (compassrent.com)? If you manage your own property you will want to choose property close to where you live for ease of service. With a management company, this will not be a concern.
Things to evaluate:
1) Property cost
2) Property taxes
3) Insurance costs
4) Potential maintenance costs
5) Profit margin
6) Short or long term investment
7) Neighborhood listings and vacancies Marketing considerations:
1) School system
2) Access to interstates and downtown areas
3) For lower income homes: access to public transportation
3) Amenities: malls, parks, etc.
4) Crime rates
Bonuses for higher end homes:
1) Lower turn-over with more stable tenants
2) Less time property is vacant
3) Lower renovation costs over the long-term
4) Higher rent
5) Resale value Bonuses for lower priced homes:
1) Lower initial investment
2) Lower maintenance costs
3) Lower renovation costs over short-term
4) Lower tax rates (varies, need to check)
Downside for higher end homes:
1) Higher initial investment
2) Higher renovation costs short term
3) Higher tax rate (potentially)
4) More demanding tenants Downside for lower priced homes:
1) Higher turnover with less stable tenants
2) Higher eviction rate
3) Higher renovation costs over long-term
4) Lowered value over time (also depends on neighborhood changes)