Steps to Take Before Investing in a Rental Property

Get smart about your next rental property choice with these five important tips.

Glenn Burgess

Thinking about investing in a rental property but not sure how to tell if it’s a good idea? In this article, I’ll give you five tips to help you figure out if a property is worth your time and money, and what you should look for in an investment property.

We’ll cover things like researching the market, assessing risks, comparing local rentals, and calculating your Net Operating Income (NOI). This guide will give you the information you need to make smart investment decisions.

1. Make sure to conduct in-depth market research

It’s really important to do your homework before diving into a new property investment. Real estate can make you money, but it can also drain your wallet if you’re not careful. That’s why the first step in evaluating an investment is to figure out exactly what you want to do with the property.

You need to decide if you want long-term renters or short-term ones. Long-term renters give you a steady income, and you don’t have to worry about finding new tenants all the time. But if you go with short-term renters, you can increase the rent between leases and have more control over who stays in your place.

Next, check out the area where you want to invest. Some things can make a place more attractive to renters, like new buildings, cool stuff nearby, or good schools. But too much new construction might mean less demand for your rental.

Don’t forget about the costs. If you’re thinking about furnishing your place, remember that buying furniture and cleaning can add up. You also need to think about appraisal and inspection fees, which can eat into your budget.

2. Evaluate potential risks carefully

Continuing from the last tip, doing a risk analysis is a smart way to get ready for possible problems in real estate. The real estate world can be uncertain, so it’s a good idea to be ready for changes in these things:

Prices for essential services like gas and electricity
How many jobs are available locally
Property taxes
Laws made by the state and local government
The quality of people applying to rent your place
Rules about real estate set by the government

To figure out how risky each of these things is, you can give them a score from one to five. Five means it’s very risky. If a property has a high risk score, you should be ready to spend more money than you might want to.

3. Compare rentals in the neighborhood

A crucial part of checking out your new rental property is seeing how it compares to others in your area. This helps to get a realistic idea of how much money you can expect to make.

To do this, look at properties similar to yours and see how much they sold for per square foot. Make sure these properties were sold recently, ideally in the last month, so you know what the market is like right now. When you’re comparing, try to find properties with a similar number of bedrooms and similar amenities.

Also, think about whether the location is right for the kind of renters you want. If you’re aiming for families, check if there are good schools nearby. If you’re looking for young professionals, see if it’s close to public transportation.

A great location can make a so-so property really desirable, so don’t forget to consider this when you’re deciding where to invest.

4. Determine your Net Operating Income (NOI)

Your property’s Net Operating Income (NOI) is the money it brings in minus all the regular costs of running it. To find it, add up all the rent you get over a certain time and take away expenses like repairs, property management fees, insurance, property taxes, and more.

If you divide your NOI by the price you paid for the property, you get the capitalization rate. This tells you how long it will take to make back your investment. A high cap rate means you’re making more money and it’s a good investment.

But keep in mind, a few things can mess up your cap rate. When you’re using it to check out a property before buying, guess what the rent will be & how much money you’ll make.

You need to do some research to figure out what similar properties charge in your area. Also, if you plan to fix up a cheap house and sell it, your cap rate won’t count the cost of renovations or the fact that you’re not renting it out.

5. Seek advice from a professional

As an investor, it’s important to know how a property’s current condition will affect its future value and potential profits when you sell it. One way to do this is by hiring experts who specialize in this area to give you an estimate.

A professional property valuation helps you figure out how much money you’ll need to keep the property in good shape. Maintenance costs are a big part of how much profit you’ll make from a rental property.

During a property valuation, experts check important things like the roof, insulation, or HVAC system to see if they need repairs and how much that might cost. You can also ask for a formal appraisal, where a pro gives you an estimate of the property’s true value based on things like where it is, how much demand there is, and the size of the lot.

Final word

The secret to a successful investment is doing thorough research upfront. Real estate can be a fantastic to have more control over your income & even make money while you sleep.

However, to make it work, you need to invest a lot of time and effort upfront to make sure you’re making a smart move. I hope the investment property tips mentioned above help you find a great investment opportunity.