Ok, so you’re looking to invest in a rental property.
Maybe it’s your first one. Perhaps it’s an addition to your growing mini-empire. Whatever your situation or experience level, there are pitfalls to avoid when shopping for an income property. Getting it right, we don’t have to tell you, means a new source of cash flow. Getting it wrong means you may have a money pit – and no one likes those.
Here are a few things to look for (and avoid!) when shopping for an income property.
Close to Home
While we always suggest hiring a good property manager, if you do choose to self-manage, proximity to your own home is essential. Middle-of-the-night repairs or getting to your property around rush hour will be that much more irksome if your rental is not close by and without a property manager.
The Neighborhood
Moreover, what about the local population? This is generally the pool from which your residents will come. Do people in this area make enough to support the rent you plan to charge? Are they families that will be long-term renters, or are many of them students (they will be if you buy near a university)? Your demographic will look for certain types of properties. For instance, families tend to be drawn to units with more space, whereas students often look for proximity to their school and/or college friends.
Crime rates are something to check out because soaring numbers can erode the value of your property and keep good residents away. You will want to learn about crime statistics before you purchase. How to find out? Your local library and police are good sources. To get more granular insights into various indices around local unlawful acts, click here.
However, this can be tricky, but worth looking into—if crime is falling in an area and new businesses are opening up, you might be onto real favorable possibilities, especially as it relates to Opportunity Zones. Redevelopment activity is helping to make neighborhoods more charming, safe, convenient, environmentally healthy, and economically secure. If you can sense that an area is improving—and you get there just before Starbucks does—you’ll thank yourself later.
For example, Oakland has persistently high crime levels, but areas of it are drawing renters and buyers because of their affordability, culture, and proximity to San Francisco. The median monthly rent in Oakland jumped 15%, the most in the U.S., to $2,846, last year, according to Zillow.
Oakland is the hottest residential real estate market in the Bay Area,” Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, recently told Investor’s Business Daily. “It’s still expensive, but it’s more affordable” than San Francisco.
There are great sources on the Internet for useful demographic information.
The Starbucks Test
Also, pay close attention to where upscale retailers like Trader Joe’s, Starbucks, Publix (especially Greenwise), and Whole Foods are putting new shops. These companies have sophisticated real estate teams that make highly nuanced decisions about where they open new stores. They do extensive research about the best neighborhoods for finding the customers they want – you should do the same.
If a Trader Joe’s, Starbucks or Whole Foods is opening in a new area, be on high alert. Their faith and trust in these neighborhoods is a good sign that the area is an excellent place to invest. It may be time to buy an investment property in this area (or areas where these stores already operate).
Property Taxes
This can be a bit counterintuitive. Usually, it’s wise to avoid high taxes, but with residential real estate, higher property taxes can indicate that the area has excellent amenities and quality schools—features that attract good, long-term residents who will pay their rent on time and treat your investment with respect. You can do this sort of research at the City’s assessment or appraiser’s office.
Now, there is one caveat: the property tax rate should be taken in the context of the whole. Not ALL areas have high taxes because they’re amazing neighborhoods. Some areas have high property tax rates as a result of a declining tax base, meaning fewer people are living there, and those who are, have to pay an expanding share of the taxes to fund city services.
Conversely, some areas have incredibly low taxes because they have an oversized commercial tax base. Cambridge, Massachusetts – home to Harvard University, MIT and the Kendall Square biotech hub is a perfect example. Cambridge has one of the lowest residential tax bases in the Commonwealth of Massachusetts – not because the City isn’t investing in the schools, parks, or other local amenities, but rather because the City has such a robust commercial tax base that it offsets the need for high residential taxes.
Be Your Own Economist
Why? Simple. If the local economy is booming and the unemployment rate is low, workers will be moving to the area, and that’s good for rents.
If you’re looking to purchase a property near where you live, you probably already know how the economy is performing. However, if you don’t, or if you are looking at a more distant area, spend some time researching the area’s unemployment rate. As a general rule of thumb, you’ll want to invest in an area that has a lower unemployment rate than the national average.
One final nuance related to this point: here’s where your homework (and intuition) matters. Consider who the largest employers are in the area. Is it a diversified economy? One pitfall that some investors make is investing in a community that has only one major employer; if that employer closes or relocates, it can cripple demand for local real estate as families are forced to move elsewhere in search of work.
We saw this happen in Fairfield, Connecticut, after General Electric decided to relocate its HQ to Boston. Honeywell also shifted its headquarters from New Jersey to North Carolina. In a tertiary example, Toyota, the Japanese automaker, transferred its U.S. headquarters from the greater Los Angeles area to Plano, Texas, in 2014. The measure impacted about 3,000 jobs.
Next Up
So there you have it: some vital considerations for your income property search. In Part II of this special mini-report, we’ll take a look at some features to look for—and avoid—in the property you’re considering for purchase.
Stay tuned! Don’t touch that dial!