Purchasing a rental home is a substantial investment. Your investment should be solid and produce enough cash flow to make it worth your time, energy and the financial commitment that is necessary to be a successful landlord.

Not every home makes a good rental. In fact, a valuable rental requires that real properties meet several key criteria.

Home Amenities – Look for a home with good bones, but one that also requires some renovation.  Adding some improvements to the property will maximize your after repair value.  This will allow you to be in better equity position in the long run.  Always make sure and do a thorough walk-through with your contractor during the inspection period.  You will want to plan any needed renovation, but also have the contractor identify any major defects in the home.

Type – Generally, single-family homes are the best types of assets for a rental property.  They typically generate a higher rate of return and offer higher potential equity capture.

Bedrooms/Bathrooms – A good rental will have at least 3 bedrooms and 1-2 bathrooms. These homes are also the best for resale value, which gives you a leg up when you want to sell your investment property.

Improvements – Avoid over-improving rental homes, as you will not get your money out of upscale granite countertops, high-grade carpet, tile, real hardwood floors or expensive appliances. While these items are easy to add before selling an investment home, they bring little value to monthly rents.

Absorption – Evaluate supply and demand for rental properties in the area you are investing.  Simply stated, if there are more rental properties available than renters, stay away.
Neighborhood – Purchase a rental property that is in a good neighborhood. For future resale value, never purchase a home that is the most expensive in the neighborhood. Instead opt for a less expensive home, as this gives you room for future improvements when you go to sell your investment. The neighborhood greatly influences your vacancy rate and the type of tenants you will attract. For example, college towns face higher summer vacancy rates than other areas, but they have the added benefit of new and returning students looking for rentals.

Schools – Tenants with children will look for rental locations near good schools. Sub-par schools reflect poorly on property values, while excellent schools can boost your monthly rent.

Crime – The Internet has made it easy to research crime statistics in neighborhoods, which means that potential tenants can easily log in online and check out your rental property’s area. When purchasing a rental, go to the public library or police station and request crime statistics by neighborhood.

Job Market – Check out the area’s job market. Are new companies going in and bringing a surge in job growth? If so, this can make your rental home more marketable to prospective tenants.

Vacancies and Listings – If there is a certain neighborhood with a high vacancy factor or many listings, this may be for good reason, such as increased crime or a seasonal vacancy cycle. Remember that high vacancy rates will force you to accept lower rent rates, which ultimately hurts your bottom line.

Rental Income – Research the average rent prices in a certain area. It is important that the average rent cover your long-term mortgage payments, property taxes, insurance and any other expenses that may arise, such as property assessments or homeowner’s dues. You should have an idea where the area is going for the next five years, which will help you secure your investment.

Natural Disasters – Talk to your insurance company to get a quote on a prospective home. If a home is located in a flood or earthquake zone, insurance rates can be costly.

Once you have narrowed down your search, look for a rental home that has the potential to appreciate while also providing you with good cash flow. Speak to professional Real Estate Brokers & Agents about market value versus the actual list price, which will help give you a better idea about what properties sell for in certain areas.

When buying a rental property, investor financing is also an important part of the transaction.  Utilizing hard money for the initial acquisition and necessary renovations is a good strategy to help minimize out-of-pocket expenses.