There is a lot that goes into what makes a rental property a good investment or not. In fact, most properties don’t actually make good investments. But what exactly determines if a property will make a good rental property?
Typically, the primary factors are the numbers and the location. The numbers matter more than anything, but location will determine whether or not the projected numbers will hold up. Someone can advertise positive returns on a property all day, but the property itself needs to perform in order to actually see those numbers.
For detailed information on what kinds of things can cause the advertised returns of a rental property to not hold up, check out “The 4 Main Risks of Owning Rental Properties (& How to Mitigate Them!).”
But assuming an investor knows how to analyze the basic numbers and market fundamentals required to determine the potential quality of a rental property, there is still one thing that most investors forget to investigate!
Huh? What in the world does that mean?
This refers to whether you actually rent the property out. Well, you can probably rent it out, but will you have to dramatically decrease the rent or take on subpar tenants just to do it?
Let’s backtrack a minute and talk about how a rental property succeeds as an investment.
I believe there are two factors that are absolutely crucial for a rental property to continue to cash flow:
- The numbers
- The tenants
The market itself plays a role in this too, but numbers and tenants are the most direct impactors in my opinion. If either of those two things are lacking, you lose cash flow. Why?
Well, the numbers are obvious. If the income on the property doesn’t exceed the expenses on the property, you lose money. So if the rental income is below or decreases below your expenses, you lose.
If the numbers pencil out fine, you’ll have to use the eraser of that pencil to change the number you use for expenses if you get bad tenants. In my experience of owning quite a lot of rental properties, the costliest expenses so far have been directly due to bad tenants.
So, the projected numbers need to shake out, and you need to be able to land quality tenants. Those are the first things you should be exploring as a rental property investor. This kind of thing involves running numbers and analyzing the market and the neighborhood you are buying in because where you buy will in large part determine the quality of potential tenants your property might attract.
Once you get all of that analyzed, and assuming things are looking good, now you’re back to needing to do one last check—rentability.
Did I mention this is the one thing people tend to not even realize they need to confirm? Let me say the word again:
I say it again so you don’t forget about it—and you don’t forget to ask about it.
I’ve written about one of my personal rental properties in this exact context before. Probably the nicest property I bought with the intention of having it as a rental property has ended up, over the years, to be the absolute hardest to rent out. When I have been able to rent it out, it’s never been for as much as was initially advertised.
The detailed story of the (lack of) rentability with this property can be read here: “Is there Such Thing as Buying Too Nice of a Rental Property? (Hint: The Answer is Yes.)”
Since that article was written, I ended up not selling the house (the cash offer I mentioned fell out), and I did end up getting it rented. However, get this: The only tenant I could find for it was a Section 8 tenant. Not only did I have to go Section 8 on the property, but the most I was able to get in rental income from it was $300/month less than what the property was originally bringing in when I bought it.
So, my nicest and biggest rental property, in the nicest and safest neighborhood of them all, has had more rental decreases and vacancies than any of my other properties. This is even in comparison to a smaller property I bought a year prior on a sketchy street where the inspector was approached by prostitutes in the driveway when he went to do my property inspection. That property has hardly ever been vacant, has only seen increases in rent, and has never needed to go Section 8.
So, what is the difference in those two properties?
The difference is the rentability of each property.
5 Questions to Ask When Determining Rentability
Questions related to rentability would include:
- How big is the prospective tenant pool for this property?
- How long are vacancy periods running for this type of property in this neighborhood?
- What is the general quality of the tenant…