1. Price-to-Rent Ratio
Generally you want to meet 1% or better. Meaning if a property costs $150K then the rent should be $1,500 or more. When you factor in carry costs, etc., 1% is a general threshold between cash flowing positive or negative.
Be sure to still run the full financials through a property calculator for a clear picture of your potential returns. However, the 1% rule is a good guide for a quick, offhand calculation when need be.
2. Keeping Maintenance Costs Low
How exactly do we do this? I mean stuff breaks, right?
When acquiring property the goal is to find one where high cost items still have a long shelf life. Otherwise, pricing the replacement of them into your offer is prudent.
Items such as:
Setting aside a portion of rents as reserves for large replacement costs is part of being a good property investor. However, those reserves need some time to build up. If your HVAC unit dies in year one – your profits just took a big hit.
3. Good Schools
For my investing goals – properties in good school districts are beneficial because rental demand for two and three-bedroom townhomes largely come from new families with young children.
Having a rental property in a good school district sets you apart from the pack in their eyes. Plus, good schools usually go hand-in-hand with good neighborhoods.
On the flip side, if you are investing in two-bedroom condos near a downtown city center then school districts really don’t have as much bearing.
Thus, know what your investing goals are and act accordingly.
4. Listings & Vacancies
In the end, we must be able to fill our rental property for it to make a good investment. Always make sure to check the current listing of the neighborhood or community you are looking to purchase in.
How many properties are listed for rent and what is the average days on market?
If a bunch of available properties are sitting on the market for a few months - you now know renting out a property in that area will be more difficult and the chance of vacancies is higher.
Posted by: Jennifer mussato
Jennifer Mussato is president at Denver-based First and Main RE powered by Keller Williams, a real estate group that specializes in commercial leasing, acquisitions, dispositions and investment strategies.