There are many reasons why investors consider adding real estate to their portfolios. Rental properties are not only hard assets that can appreciate in value over time, but they also provide passive income if they are tenant-occupied. However, instead of basing a purchase decision on hard data, many new investors make their decision for different reasons. Do you know how to determine a good rental property from a mediocre one?

Although price and location are essential elements behind what makes a good rental property viable, there are many other factors new investors should consider before putting their money down. Here are the seven features every property buyer should assess to ensure they are getting the best possible asset.

1: Population and Job Growth

It should come as no surprise that people want to live where the jobs are. In many situations, your rental property income may be directly tied to how rapidly the local population is growing and the number of jobs available in the area.

When looking into what makes a good rental property, census data and economic growth should be among the top considerations. If the population continues to grow and the unemployment rate remains low, the combination suggests that the local economy is healthy and demand for rental units should remain positive. However, if a market’s population is stagnant and the unemployment rate is at, or over, five percent, it may not be the best place to invest in rental property.

2: Location -Neighborhood, Schools, and Crime

Once you have decided on where you want to start looking for investments, the next step requires getting more granular data. This research includes looking at neighborhood data, school district information, and the local crime rate.

In many situations, homes in desirable neighborhoods will drive higher rental property income than those that are further away from population centers. Local parks, access to public transportation, and nearby shopping can all increase the desirability of a rental home, resulting in better returns over time.

Local amenities are not the only consideration families look at when deciding where to move. School districts also directly affect rental property income as well. Renters with children want to know that they will be able to send their children to the best schools, either through a public school district or at nearby private schools. Before placing a bid on a bank-owned home, be sure to check out the ratings on local schools to see if they will fit the demands of your renters.

Finally, the local crime rate will also have a direct impact on your potential rental property income. Renters want to know that their home is safe and will not have to worry about their well-being any time they step out the front door. As you are looking for potential investment properties, look at local police reports and crime data to determine if the neighborhood is secure.

3: Property Taxes

When calculating net income, property taxes may take a cut into the gross rental property income you could receive every month. How much the taxes take depends on the state, county, and city rates.

Factoring in property taxes can help you understand the total cost of ownership before you place a bid. Because tax rates vary and ultimately depend on the property’s appraised value, there are plenty of actions owners can take to keep their obligations low.

Keeping the home amenities in line with other properties and maintaining the elevation to be similar to other neighborhood homes could give you a tax advantage, no matter where you purchase.

Conversely, tax rate by itself does not necessarily indicate a property’s chance at success. A home located in a high property tax zone but is highly desirable could drive good rental property income, while rural real estate in a lower tax area may not be as desirable, leading to long inoccupancy periods or a reduced rental ceiling.

4: Property Condition

A profitable rental property is best defined by its ability to drive passive income for the owner. The longer the property remains unoccupied for rehabilitation, the more money it will need to bring in before the owner can break even.

Most foreclosure listings will list the condition of the home, along with current pictures. Additionally, some properties may be available for interior access prior to being sold. Before placing a bid on any potential rental home, be sure to understand what you are buying and how much work it will take before you can accept your first tenants. You can’t earn any rental property income until it is rehabilitated and ready for occupancy.

5: Local Market Real Estate Trends

It’s been said that past performance predicts future returns. In real estate, past performance is not only an indicator of how much rental property income you could earn, but it can also reveal potential growth over time.

When looking into what makes a good rental property, smart investors will look at the local market real estate trends over time and use them to predict where their investments could go. Increased home valuations, average rental costs, and sales prices over the past several years suggest a healthy market where assets grow.

If rent is stagnant and houses stay on the market for extended periods of time, then the market could be preparing to retract, which may expose your rental property to depreciation.

6: Cash Flow & Growth Potential

Although real estate trends are helpful tools to use when determining if a rental property is a lucrative opportunity, they aren’t the only item to look at. Before purchasing any rental property, it’s important to execute your own calculations to determine cap rate, your potential net rental income, and rate of return.

At the end of the day, rental property income is the most direct return you will get on an investment property as long as it’s in your portfolio. By calculating the possible cash-on-cash return of a rental property and cap rate, you can make an educated decision on whether a potential investment is a boom or a bust.

7: How to Get the Information

How can potential homeowners find the facts before they place a bid? In many cases, much of this information is available online. Launch your search at the county’s clerk, recorder, or tax assessor’s office on the property. A quick search can show you the title history, assessment history, school district zones, and all the other pertinent information about the home.

From there, information about schools can be found at the county and state superintendent’s office. Police and sheriff’s offices keep crime data about different parts of town, while the Census Bureau can provide historical data on population and employment changes. Doing the research ahead of time, you can arm yourself with everything you need to make smart purchases, leading to optimal rental property income.

Conclusion

Learning how to determine a good rental property doesn’t have to be an arduous task. By knowing what to look for and where to find it, you can discover the best investment real estate opportunities, potentially creating a passive income stream for years to come.

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