The decision to become a landlord is certainly exciting – the search for a property, marketing for a tenant and potential to bring in money every month.
But before you go buying the first empty house you see – or worse, a house you didn’t even look at – know that your investment is better made when you’ve carefully run the numbers.
Even when you’re just renting out a single-family home or duplex, real estate investment isn’t as easy as it may seem. A smart investment requires a look at market rents, a calculation of income potential and consideration of additional costs to both prepare a property to rent and make long-term repairs.
That’s not to mention factoring in costs you would have to absorb if the property sat vacant for any period of time. Bryan M. Chavis, a property management consultant and author of “The Landlord Entrepreneur: Double Your Profits With Real Estate Property Management,” says the potential for failure is often overlooked by excited rookie investors.
“A lot of people get anxious to participate in a deal, so they’ll take on more risk than what is necessary or they’ll jump into a deal just because it’s listed or they feel it’s a good deal … and they’ll rush into an investment that doesn’t make sense,” Chavis says. “And that’s are where the mistakes are made.”
Every investment property requires a careful assessment of the value of the property, amount of debt you’ll take on, expected income and other operating costs. Those property-specific numbers are also dependent on the local rental industry. Here are four things to consider as you look for the right rental property.
Find the market and submarket. A property in your neighborhood may seem like the most convenient investment option, but that doesn’t mean it’ll be worth your time and money. You first need to identify the best market for your investment, plus the submarkets – often broken down into neighborhoods – where a rental property will be most fruitful.
If you’re planning to manage the property yourself, your local market makes the most sense. Now, narrow down submarkets based on where renters are more likely to search – for example, near public transportation or within easy access to highways. Regardless of the tools you use to find and purchase available properties, a more general search on a site like Zillow, Apartments.com or Rentpad could show you where rental properties are most common and at various price ranges.
“The process begins with evaluating a targeted area,” Chavis says.
An ultra-luxury neighborhood nestled far from downtown might leave you hard-pressed to find renters, but on a street where new renters are always moving in you might have found a submarket to focus on.
Off-campus student housing is an easy-to-identify type of rental property that excites investors. Woody R. Fincham, vice president and Virginia regional manager of appraisal company The Trice Group, resides in Charlottesville, Virginia, home of the University of Virginia, and says investors tend to keep much of their attention on properties within walking distance to campus because the increased demand allows for a higher rent.
“If they’re within walking distance of [University of Virginia grounds], that generally is a premium, so investors are generally looking for that,” Fincham says.
Weigh property class options. As you identify the submarket that will yield the most demand among renters, also consider the quality of the property you’d like to own based on what you can afford and what renters flock to.
Property classes are typically broken into three categories: A, B and C. Properties in Class A will be the top quality in that market, typically new and higher priced. Class B properties tend to be a bit older but well-maintained. Class C properties are older still, often in need of renovations and repairs and located outside the prime real estate locations.
Age, architectural style and renovation specifics can vary based on location. A Class A building in New York City isn’t going to compare with a Class A building in Huntsville, Alabama, simply because they attract two different types of residents.
You may be better off focusing your investment toward a Class B or C property, because while there may be some required work on the property, you avoid narrowing the pool of potential renters with an expensive rental rate.
“Typically investors are looking to buy low, and they’re usually looking to buy stuff that’s not in the best condition,” Fincham says.
For that reason, Chavis says, you’re also less likely to feel the negative effects when real estate trends shift. If you rent only to the super-wealthy, they have the flexibility to choose to buy a home fairly easily, which shrinks the demand for luxury rentals, compared to other renters, who rent for longer since they have to save up to become homeowners.
“I see a lot of risk and a lot of volatility in those [Class A] sectors – more so than do the B, C, middle-class demographic assets. I feel those are a tad bit more stable,” he says.
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Know the most likely renter. Closely paired with the property class to buy is the renter most likely to be interested in becoming your tenant. That person is a key component into the kind of renovations and upkeep you’ll need to maintain the home.
For off-campus student housing, for example, landlords often don’t have to be as concerned with providing new appliances or newly painted walls as they would with a family recently relocated by a major corporation.
“Students are not as persnickety, per se, as the average consumer,” Fincham says.
When it comes to identifying the most likely renter, it helps to be familiar with the area. Arik Kislin, a real estate investor and developer and CEO of Linx Industries, says it’s important to have a solid grasp on the typical renter in a neighborhood, or at least work with someone who does. Not knowing the regional and ethnic makeup of a neighborhood like Jamaica, Queens, in New York, he says, could mean that people simply don’t want to do business with you because you're viewed as an outsider.
“You don’t want to be the odd man out … because it’s not going to be accepted well,” Kislin says.
Plan for the worst-case scenario. Whether it’s a recession that hits or even an increase in homeownership rates, there’s a possibility you’ll have to lower rents at some point to attract renters. If the city or neighborhood you live in undergoes serious changes, your rental property may even sit vacant for months.
It’s important to know how long you’d be able to afford fronting the costs of a vacant rental space or how low you could make rental rates before you’re no longer profiting.
Even with the current rental climate in most markets, with high demand and rents outpacing affordability in places like San Francisco and New York, Chavis says landlords shouldn’t expect rents to continue to climb at the rate they have in recent years. Median rent for a one-bedroom apartment in San Francisco currently stands at $3,390, according to rental information company Zumper. While it's a high rent to be sure, it hasn't changed much going back to the same month in 2015, when the median rent reached $3,530, a new high after increasing more than 13.9 percent from the year before, per Zumper's monthly national rent reports. With affordability being a significant problem in the Bay Area, landlords shouldn't expect to see major increases in rent going forward, and they can even expect more dips.
“These high, ridiculous rents are going to eventually reach a ceiling … which could cause some problems and issues,” Chavis says.
As you weigh the potential profitability of a rental property, include the possible scenarios of a plateau in rental rates, decline in demand and the occasional big-ticket repair that could take money out of the bank rather than putting money in. They’re not the numbers you want to think about when you picture yourself as a landlord, but they’re the numbers that can keep you from taking on a bad investment.
8 Apartment Amenities You Didn't Know You Needed
Renting is in, and so are amenities.
More people than ever are renting rather than owning, with more than 35 percent of Americans living in rented housing as of 2014, according to the National Multifamily Housing Council. To compete with the growing number of rental opportunities in the U.S., many apartment communities are upping the ante with luxurious amenities that make living easier, more convenient and more fun. While resort-style pools, movie theaters and recreational spaces are becoming the standard, many places are going above and beyond to appeal to residents looking to rent in the area. Here are eight apartment amenities you never knew you needed – until now.Making fitness fun
Making fitness fun
Full fitness facilities, complete with treadmills, weightlifting machines and free weights, are quickly becoming standard for many apartment communities. Even buildings without space to accommodate a small gym often offer discounted memberships to nearby gyms. But at The Lorenzo in Los Angeles, residents get to take advantage of more recreational fitness options, with a rock wall and indoor soccer field on the premises. As off-campus student housing for the University of Southern California, The Lorenzo's student residents don’t have to worry about reserving on-campus facilities for a pickup game or quick climb in their free time.Water features for everyone
Water features for everyone
Pools are quickly becoming a staple for even midsize apartment communities. And while some aim for terrific views and lap lanes, others are reaching beyond their own walls. The Villages of Parklands in the District of Columbia, owned by property management and development company WC Smith, includes a splash park that's open to community residents and the surrounding neighborhood. “It’s something that’s not just a high-end amenity for people with lots of disposable income,” says Anne Marie Bairstow, vice president of marketing at communications at WC Smith.Tuneup space for two wheels
Tuneup space for two wheels
Particularly in major cities where parking can be expensive, residents take to bicycles for their commute to and from work as well as pedal around the city for recreation and exercise. AVA Little Tokyo in Los Angeles, owned by AvalonBay Communities Inc., helps its biking residents stay on two wheels with bike storage and a repair station, which includes a lift to make it easy to work on your bike and any tools you might need to make improvements and repairs. Residents take full advantage of the facility, says Juan Rodriguez, sales and service supervisor at AVA Little Tokyo. “The storage itself is pretty much always full,” he says.Pets as a priority
Pets as a priority
Pet-friendly apartments are in high demand for renters who want to ensure comfort for the furriest members of their family, but at 2M apartments in the District of Columbia, also owned by WC Smith, pet residents get their own representation. Emmy, an English bulldog owned by the property manager, is the official “pet ambassador.” She regularly draws residents into the management office for a quick pet and playtime while also highlighting the building’s pet-positive attitude and private courtyard for dog walking. “Dogs just make friends, and so everybody that has a dog knows the other dog owners, and it really helps to build the community,” Bairstow says.Living in a luxury hotel setting
Living in a luxury hotel setting
If you’re going to live in luxury, why not live like you’re in a high-end hotel? Residents at The Atlantic Midtown in Atlanta can opt to purchase concierge-arranged services, from housekeeping to dog walking to room service. While anyone can hire similar services themselves, the added hotel-like concierge service removes items from your to-do list and relieves the stress of finding the right vendor.Swinging for the greens year-round
Swinging for the greens year-round
Luxury communities throughout the country have been tapping into their residents’ love of golf. While some add small putting courses and even a sand trap or two, others go a little further. At AMLI River North in Chicago, owned by AMLI Residential, golfers don’t have to put away the clubs once winter hits. The community has a golf simulator for golfers to practice their swing whether it’s snowing outside or it’s tough to get a tee time at nearby courses.Facilities for your fruit of the vine
Facilities for your fruit of the vine
Forget wine bottles lining your countertop or even a wine cooler in your kitchen. Lincoln Property Company's Highgrove apartments in Stamford, Connecticut, appeals to wine aficionados with a private space for each residence in a climate-controlled wine cellar. The community confirms most residents take advantage of the wine cellar, which offers space for roughly 30 to 40 bottles per household. Thanks to this free amenity included with renting in the community, wine lovers avoid having to go elsewhere to store their favorite wines that are best served with a little extra care.An eye for art
An eye for art
As amenities like fresh coffee and business centers with free Wi-Fi draw residents into common areas, property managers and owners know they have to make the spaces as appealing and entertaining as possible – which is one reason curated art collections are popping up in luxury communities around the country. Communities like Jasper in San Francisco feature art throughout their lobbies, mail rooms and other common spaces. The art displayed in Jasper "tells a story of a contemporary San Francisco 21st century style with a nod to its film noir history," according to a statement from Jasper's art curator, Maria Di Grande. The collection includes commissioned collages as well as street photography.Read More
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She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.
Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at email@example.com.
Devon Thorsby | June 5, 2019
Homeowners should not fret, as long as they're prepared for the possibility of a downturn.