How to Determine if a Rental Property Is a Good Investment

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Investing in real estate, as you likely know, is an excellent way to earn some short term rental income and long term returns. It can establish a financial foundation for you, diversify an investment portfolio that’s otherwise packed with stocks, bonds, and bitcoin, and provide an opportunity for you to build some real wealth.

Owning rental properties comes with a myriad of benefits.

But, to make any real money, you have to own the right rental properties.

How do you know what those are?

The right rental investment depends on where you are in your investment career, what you’re hoping to accomplish, and how much money you’ve budgeted for things like renovations, maintenance, and vacancy. The ideal investment opportunity varies from investor to investor. You need to have a solid understanding of your own investment goals and an awareness of how the market is performing now and will likely perform in the future.

While the right acquisition will depend on why you’re investing and what you’re hoping to achieve, there are a number of things that will tell you right away whether you’re considering a profitable rental home.

We’re taking a general look at some of the most common indications that you’re considering the right rental investment.

Everything in Real Estate Starts With Location

Whether you’re planning to invest in Phoenix, Mesa, Gilbert, or some other community in the East Valley, you have to understand the region on a macro level but you also have to educate yourself on the unique neighborhoods within each market. Location is crucial when it comes to investing, and you don’t have to be a real estate expert to know that.

When you’re choosing the rental property you want to buy, it’s important to make sure that the neighborhood is one that tenants want to live in. Those good tenants you’re hoping to attract will prefer areas in good school districts. They’ll want to be just a few minutes from shops, restaurants, grocery stores, and other conveniences.

Location drives your rental value of your property, the quality of tenant you attract, and the number of vacant days you have to struggle through before placing a well-qualified renter.

Focus on properties in neighborhoods that are easy to reach. Tenants will be looking for easy access to work, school, entertainment, and recreation. Look for a location that will appeal to your best renters.

Good location is about more than just aesthetics and ease. You’ll also want to invest in a property that’s in a safe neighborhood. Research crime statistics and see what types of measures are in place to protect the community. A neighborhood watch is a good sign, and homes close to police and fire stations make sense when you’re investing.

Try to Buy a Rent-Ready Phoenix Investment Property

Maintaining a home is a big part of investing. You know you have to budget for ongoing maintenance and repairs, but what about the work that will be necessary as soon as you buy?

Unless your plan is to buy cheap homes and flip them for higher prices, you want to avoid the fixer uppers you’re likely to encounter when looking for a rental home. Focus instead on the homes that don’t need a lot of work right away.

A lot of time and money will be spent renovating that house and not only do you have to consider how that impacts you financially, you also have to think about the delay in getting the home on the market. You won’t collect rent right away. It may take months.

Instead of committing to long and potentially expensive renovations, look for a property that’s nearly ready to rent out.

It’s necessary to think about the maintenance that will be required during the tenancy. How old is the property? When was the roof last replaced? Are the appliances in good shape?

Different amounts of time and resources go into maintaining investment properties. Your maintenance budget will depend on the current condition of the home and the tenants you place. You’ll spend less on emergency repairs when you have a good preventative maintenance plan in place.

Get an idea of how much it will cost you to maintain the property before you buy it. You’ll want a complete and professional inspection so you know where the trouble spots may be.

A well-maintained property will attract stable, long-term renters. It doesn’t have to be the nicest house on the block. The ideal rental investment may not be an attention-grabber with garden tubs and custom pools and marble floors. You’re investing in a rental home, and you need to think about what tenants need.

A well-maintained rental home that only needs some cosmetic upgrades is your best option when you’re looking for a good Phoenix investment property.

Estimate How Much an Investment Property Will Earn

Good rental investments will make you money. It’s really that simple.

To know if you’re investing in the right rental property, you need to know how much money you’ll earn in rent and how much the property is likely to appreciate in value over time.

When calculating your expected return on a property, most investors will use the 1 percent rule. This is a quick way to establish how much positive cash flow you’ll earn on a potential investment. Each month, you want to bring in no less than 1 percent of what you paid for the property.

Here’s an example of how this would be calculated. Maybe you purchase an investment property for $250,000. As you’re estimating what you’re likely to earn on this property, you’d want a rental value that’s at least $2,500 per month, or 1 percent of what you’ve invested.

It’s simple math, but it works for some investors. Others dig a little deeper in estimating whether an investment is financially sound. Just remember that you won’t always see strong returns right away. You might not have positive cash flow for the first year or two. That doesn’t necessarily mean it’s a bad investment. A lot of investors are more interested in long-term gains instead. If positive cash flow isn’t so important to you in the first year, focus on where the 1 percent rule might make sense. For example, try to keep your mortgage payment to at least 1 percent of that investment.

Think about appreciation and don’t forget to consider how you can increase what you earn in rent. Stable, long term tenants, low vacancy, and property upgrades will help you earn more on your investment. During each turnover period, you’re likely to put new paint on the walls. You might upgrade the floors and install new appliances. That will help you raise your rents.

Think about how much your property will be worth when you are finally ready to sell in 10 or 20 years. That appreciation potential will tell you whether you’re making a strong investment.

Compare Expense Estimates to Earnings Estimates

As we already said - a good rental investment property earns you money. Every property will also cost you money, and you need to prepare for those expenses.

Investing in real estate doesn’t come with a one-time price tag. Ongoing expenses will show up every month, every year, and sometimes when you least expect them. Plan for marketing, maintenance, professional property management, vacancy, and other fixed and variable costs.

It’s not always easy to anticipate every expense. You’ll likely find that some calculations and estimates are off. Try to budget as accurately as you can, and set aside a reserve for any of those sudden surprises.

Your fixed expenses will be much easier to budget for when you’re considering an investment property. Those costs will include:

  • Mortgage

  • Property taxes

  • Homeowner’s insurance

  • Property management fees

  • HOA fees (if applicable)

  • Preventative services such as landscaping and pest control

Then, there are the variable expenses, which are challenging to predict. These will include:

  • Unexpected repairs

  • Vacancy

  • Turnover costs

  • General wear and tear

  • Eviction

A good investment property will allow you to identify and estimate where the most of your money will be spent.

Property Management in Phoenix and the East Valley

A local property manager can tell you whether a potential property will make a good real estate investment. You’ll access resources and expertise as well as a deep understanding of the local market, the local tenants, and the local rental values. Your property management partner will know which vendors can help you get the home ready to rent.

You might be thinking that you won’t really need a property manager until after you’ve closed the deal and you’re ready to think about marketing and leasing the home. Don’t wait. Instead, contact a property management company early - before you buy. You’ll find that you have a deeper understanding of how much rent you’re likely to earn and what those expenses might be once you’re planning a maintenance budget.

Your property manager can help with vendor and contractor referrals. They can introduce you to insurance agents, legal experts, and brokers.

We’d love to be the property management company you consult. Our team focuses on positive investment experience and lower maintenance costs. We can help you identify the right investment. Please contact us at TCT Property Management Services. We manage homes in the East and West Valley, including Mesa, Gilbert, Chandler, Scottsdale, and Phoenix.