How to Determine if a Rental Property is Worth Your Money

Desirable rental properties in high-demand areas can net their respective owners a considerable profit each month. Unfortunately, not every investment opportunity is this cut-and-dry. More often than not, determining whether a rental property is worth your time, effort and capital will require a bit of research and legwork on your end. Considering how much money is in play, taking the time to do your homework can prevent you from making a massive mistake.

Consult with Accomplished Investors 

If your real estate investment experience is minimal to nonexistent, you’d do well to consult with accomplished investors ahead of your first purchase. So, if you have any friends, family members or coworkers who have owned and/or maintained rental properties, don’t hesitate to reach out to them. In addition to educating you on buyer’s market vs seller’s market, seasoned investors will be able to give you the lowdown on what to look for in your ideal rental property. Alternatively, if no one in your regular circle possesses any rental property knowhow, it may be a good idea to seek advice from a real estate investment company. 

Have the Property Meticulously Inspected 

You should never invest in a rental property that hasn’t undergone a meticulous inspection by certified professionals. In fact, any deal you make concerning the purchase of a rental property should be contingent upon an inspection taking place. Even if you’ve done a personal walkthrough of the property, there’s no guarantee that various problems didn’t escape your gaze. Furthermore, unless you’re a professional property inspector, there are a number of problems you’d never even think to look for. 

From a buyer’s perspective, property inspections are always a good thing. For starters, the results of an inspection stand to give you enhanced bargaining power. After all, if any hitherto-unknown issues are uncovered, you’ll be well within your rights to request that the asking price be lowered. Secondly, if an inspection reveals problems that demand costly repairs/renovations, you may ultimately deem the property an unsafe investment and determine that your financial resources would be better used elsewhere. 

As a buyer, you should always be wary of sellers who are vehemently opposed to inspections. Even if they aren’t trying to actively conceal issues with the property, such behavior would suggest the opposite. So, if you find yourself dealing with a seller who refuses to allow an inspection, do yourself a favor and walk away.    

Research the Location of the Property 

The last thing any investor wants to be stuck with a rental property in an undesirable location. So, before getting started on any paperwork, make sure to research the location of the property. For example, you’ll want to get a good sense of the local rental rates, as this will give you an idea of how much you’ll be able to reasonably charge tenants. You should also get a feel for the local economy, crime rates and growth projections, as these all play a role in determining an area’s overall desirability. No matter how nice a rental property is, it’s unlikely to turn a healthy profit if it’s located in an area that people aren’t keen on moving to.  

Consider Operating Costs 

It’s important to understand that the cost of a rental property isn’t limited to the sale price. With larger properties, for example, you’ll need to consider the cost of property taxes, general utilities and maintenance. 

Maintenance is particularly important for apartment buildings and condo complexes with dozens of units. In fact, depending on the size of the property, you may need to employ full-time maintenance personnel. Needless to say, paying multiple salaries can prove very expensive, so before committing to purchase a larger property, you’ll need to compare the cost of maintenance staff to how much rental income the property stands to generate on a monthly basis.  

Not every rental property you come across represents a worthwhile investment. While some properties can act as perpetual passive income generators, others leave quite a bit to be desired. Making an ill-advised choice when it comes to rental property investment can cause lasting damage to your finances and leaves you reeling from the world’s worst case of buyer’s remorse. So, the next time you have an opportunity to purchase a rental property, you’d be wise to do your homework and heed the pointers discussed above.