How To Choose A Rental Investment Property

Its a tricky business, finding a property that will make for a great rental investment, but there is a method to the madness, for patient investors. Heres a quick look at what makes a good one, and how to choose a rental investment property.

Question 1: What kind of neighborhood?
The higher on the price ladder you climb, the smaller the percentage of renters in a given neighborhood, which means two things: 1) a smaller pool of rental applicants, and 2) smaller profit margins. Both of these effects are due to the fact that most people that can buy houses DO buy houses, and it will be harder to find a good quality tenant in an area where most residents are homeowners.
But the flip side of that coin is that lower end neighborhoods have high crime rates, less economically stable tenants, and a drastically higher risk to the landlord of being sued. So how does one choose a strong rental investment property?


First, look at stable, working class (which is not the same as lower class) neighborhoods. These are established neighborhoods where many people live in their houses for many years at a time, and there are stable blue collar jobs nearby. It is often possible to create a strong profit margin with an excellent tenant in such neighborhoods, especially if you can find one who wants to stay for a long time.

Second, look at immigrant neighborhoods, as many immigrant communities are closely-knit and share a strong sense of community. There are relatively few homeowners in many of these neighborhoods, but they will attract future immigration, which means a faster population (read: demand) increase.

Finally, consider college neighborhoods, as mommy and daddy often pay the rent. These neighborhoods, because of the ever-expanding demand and utter lack of homeowners, will often bring the greatest profit margins, but those profits come at a price. Turnover rates will typically be annual, and college students are notorious for trashing properties. If you elect these neighborhoods, make sure to collect the largest security deposit thats legal in your state.

Question 2: What kind of property?
After youve chosen a neighborhood, its time to start looking at individual properties. Granted, some neighborhoods are almost exclusively composed of one type of property, in which case the decision is made for you. But in other cases, there may be detached single family dwellings, and townhouses, and multi-unit apartment buildings, in which case youll need to make a decision.

Townhouses will almost definitely be the least expensive option, which means it may be all you can afford when it comes to your down payment and closing costs. And they have other advantages: they are cheaper and easier to maintain, renovate, and clean, and because of their smaller size, there are simply fewer problems that can pop up. But the neighbors are VERY close by, which can cause problems (basement leaks, lawsuits from opportunistic neighbors, etc.), and most prospective tenants would prefer a detached property, leaving you with the leftovers as rental applicants.

Detached single family dwellings can have great curb appeal, and thus attract top quality tenants. That said, they require substantially more maintenance, and many people would just as soon buy such a property as rent one. They are also more expensive, which means higher up front costs.

Finally, there are apartment buildings, which are usually much more expensive than any single family property, thus pricing out a lot of investors. But they usually offer the greatest cash flow/profit margins, which makes them an excellent choice for more experienced rental investors. Pitfalls can arise from zoning problems, and permits, and all other kinds of bureaucratic nightmares, not to mention the greater cost to maintain or renovate, but if an investor can successfully navigate these issues, and can afford to carry the property while its not fully occupied, these multi-unit properties can make excellent rental investments.

Choosing a rental investment property can be a hairy business, but it can also be a lot of fun. It doesnt cost anything to look, so find a realtor familiar with your area, and start scouting!

By: G. Brian Davis

Article Directory: http://www.articledashboard.com

For the intellectually curious, and those serious about rental & real estate investment, here are a few free resources for rental investors:
Free Rental Forms
Real Estate Investing Blog
Landlord Blog