When you are considering the purchase of a rental property, you want to make sure that your investment is going to be profitable, and that it will produce income for you in the years to come. Trying to predict profitability, however, could be difficult as a lot of different variables and factors will come into play.
Here are a few of the most important factors you may want to consider when determining how profitable your rental property is going to be for you:
What kind of neighborhood is the property in?
The more affluent the neighborhood, the more money you can charge for rent and the better "behaved" and better-paying tenants you're likely to attract. That said, just because a rental property is in a lower income area doesn't mean it won't be profitable. It just means that additional screening of tenants may be necessary and you'll want to make sure you're paying a price for the property that will still allow the rent it generates to be profitable. A high crime rate in a particular neighborhood could also hurt your rental income.
What kind of property taxes will you need to pay?
Property taxes in different areas of a city could be different. For example, one area of your county could be subject to exorbitantly high property taxes whereas another area has very low taxes. Be sure to consider these financial liabilities when calculating how much you will charge for rent and whether the property will be profitable.
Is the job market and economy strong?
Imagine you bought a rental property in Detroit's "Rust Belt" just before the downturn in the American auto industry. You probably would have paid top dollar because of the prevalence of top-earning autoworkers in the area. A few years later, though, as jobs began to disappear, you wouldn't be able to charge the same in rent. Job market and a strong economy are vital for a rental property's profitability.
There are many other things you should consider before buying a rental property. For example, it's vital that you investigate real estate law concerns, zoning and other issues before you pull the trigger on a large real property investment.
Source: Investopedia, "Top 10 Features of a Profitable Rental Property," Andrew Beattie, Jan. 23, 2018