Criteria for a Successful Rental Property

The following is a guest post from Dan – a real estate and dividend investor. He has never had any consumer debt, rarely pays retail price for anything and is a CPA. He writes at his site, Our Big Fat Wallet. http://www.ourbigfatwallet.com

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I currently own one rental property and in the next few years (depending on how the market conditions are) I plan on buying another one. While some prefer to invest in equities only, I believe it’s important to hold a diverse set of assets to reduce risk.

When I do eventually decide to buy the second rental property there are a few key things I will be looking for.

Cash Flow

This one is fairly obvious and easy to determine – the property needs to bring in more cash each month than the monthly costs.

I prefer to be conservative when it comes to estimating cash flows on a rental property so that I can have a realistic idea of how much money it will make.

To figure out how much rent it will bring in I usually look at comparable properties using local online rental listings. The listings that are closest in location and features usually give the best idea of how much rent I could charge. Some people look at average rent amounts found through media or government surveys; I tend to avoid these because I find them to be vague and sometimes misleading. The best sources of information on rents are found closest to the property itself, and online rental listings are an easy way to find them.

I charge slightly below market value for my rental property because it means it gets more attention when it’s listed. The more attention it receives, the more showings and better quality tenants there are to choose from. Sure, I could charge top dollar but I’d rather find a high quality, long term tenant so that it won’t sit vacant. The strategy has paid off so far – the current tenants have been in the property for years and are happy to continue living there, and the property has been occupied 100% of the time since it became a rental.

Estimating Monthly Costs

When estimating monthly costs, I like to set aside a small amount each month for repairs and maintenance so that anything that needs repairing can be done right away. I also forecast a small amount each month for vacancy; depending on the local rental market conditions the property may sit vacant for a period of time with no rental income coming in. It’s important to budget for this to make sure there is enough money to cover the monthly expenses in case the property does become vacant.

Other monthly expenses to budget for are easy to estimate: mortgage (easily estimated using a mortgage calculator), property taxes (using the city assessment), insurance (using an insurance quote) and utilities (based on past history).

Nearby Amenities

The location of the property is obviously one of the biggest factors on how much demand there is. I also like to look at specifics of the location based on what my potential renters would want.

For example, a single detached home will likely attract couples or small families, so it’s important they have the amenities they would be interested in. Schools for children, parks or green space for kids and pets and recreational areas are all things that a family would be interested in, so I’d want to make sure they are close to the property.

On the other hand, a small high-rise condo is more likely to attract young professionals entering the workforce so it’s important they are close to the amenities they would likely want – access to nightlife, rapid transit and fitness facilities.

No matter what demographics you are marketing the property to, it’s important the property is located near the amenities they would want – a better location means higher demand which can mean more profits in the long term.

Conclusion: my next rental property will need positive cash flows each month to make sure it will be profitable. It will also need to have a good location near the amenities that the target market would want. Cash flows and location are two very important aspects I’ll be focusing on for my next property.

Are you a landlord? If so, how do you make sure your rental property is profitable?

5 Responses to “Criteria for a Successful Rental Property

  • Did you take out a 30 year fixed on your first rental property and do you plan to do the same on the next? Do you pay the minimum monthly mortgage payment? Just trying to get a feel if you like leverage or are trying to pay down the debt. Everyone is different! Good tips, thanks.
    Fervent Finance recently posted…Managing Your FloatMy Profile

  • Totally agree that you want to make sure the property is cash flow positive out of the gate.

    Another criteria for me is that it has to be within driving distance. No more than about an hours drive is ideal to me.

    No consumer debt? I assume you exclude mortgages?

    Cheers!
    Gen Y Finance Guy recently posted…February 2015 – Detailed Financial Report #2My Profile

  • I agree that cash flow is the most important factor. I became an accidental landlord when I moved to another state and didn’t sell our house. Unfortunately, the market sucks there and we lose about $35/mo after paying the property manager.

    We are considering purchasing one or two studio condos in Hawaii where our family lives. They’re in a great location and by paying cash up front they will generate a nice cash flow.
    Jessica recently posted…My Friends Make Fun of Me for Being FrugalMy Profile

    • EvenStevenMoney
      3 years ago

      If you stop by again, tell me more about the Hawaii condo’s? I’m curious on some of the numbers and rent, etc.

  • In property deals, chances of loss are very low if you are considering each and every factor of property considerably. The most important factor is location where the property is situated. The people having their property in more posh areas are tend to ask high price.

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