If you’re looking to purchase an investment rental property, you’re likely asking two questions: How much will it cost? How much can I earn? The answers to these questions are complicated, depending on myriad factors. How much you earn depends on how much you spend. But the purchase price and rental income aren’t the only factors impacting your profit margin. Your rental property has features that determine its profit potential, and they can change from year to year. Here are 6 Features Consistent with Profitable Rental Properties:
Table of Contents - 6 Features Consistent with Profitable Rental Properties
Most of the factors that impact your rental home’s profitability comes down to the neighborhood. The type of neighbourhood impacts what kinds of tenants you attract and your vacancy rate. A university town will likely attract students who are less keen to rent in the summer months, for example. Some neighbourhoods have their own personalities and may attract tenants who simply want to say they live in the area. Other neighbourhoods are defined by their job market (see more below).
Some neighbourhoods discourage rental properties with high permit fees and complicated hoops to jump through. If you planned to place your rental property on a home-sharing site, you might face similar barriers depending on the city.
Also, different neighbourhoods will host different tenants. If there is a specific type of tenant you wish to avoid, do some research and find out where they like to live. Avoid the locations these tenants like to live in.
An important factor when determining your investment range is how much you’ll be paying in property taxes. When comparing properties, high property taxes may not be a bad thing if the home with higher taxes is in a better neighbourhood. However, high property taxes do not always spell a nice area. Do your research to learn what property taxes in an area and have been in the past. Find out whether the city might be planning to raise those taxes in the future.
Most cities in Canada have an online property tax system. You can look up the property by its address to discover the annual property tax amount. Always check with the city if possible to determine the taxes.
Often times when you're buying a new home, the MLS listing will include incorrect taxes. It's advised to never use the figure on MLS, it could be from last year and no longer accurate. A home that has had recent renovations could have a spike in taxes from one year to the next. Because of this, you never want to use the figure on the MLS listing.
Area rental prices
Most of your cash flow is earned from charging rent to your tenants. You’ll want to know what you can realistically charge to earn a return on your investment. Research current rental rates for similar properties in the neighbourhood. If you can find past rental rates, you can gauge whether the neighbourhood is increasing in value. If charging the average rent won’t cover your expenses, then the property (and possibly the area) is not for you. It may be tempting to charge more, but this could ultimately deter smart tenants and lead to a higher vacancy rate.
To discover the going rents in certain areas looks to tools such as MLS or Kijiji. Often you can find homes for sale, and you can compare their location and quality of finishes to your property. This comparison will help you to get a good understanding of rental prices.
Lastly, you could speak to a local property manager whom you're considering using to manage your rental property. Property managers have a wealth of information when it comes to knowing the rental market. They can help you figure out what a property can rent for, oftentimes before you even buy the rental property.
If the rental property is located near a major job center like a hospital or university, you’ll have a better chance of keeping your rental occupied. Statistics Canada can help you find out more about the job market in a particular area.
If a major company is coming to town, you have an excellent opportunity to rent (likely at higher rates) to relocating employees. But a new corporation is a double-edged sword: while your income potential is higher, the cost of the property you purchase might also rise.
You can also check the unemployment rate for a city. If the unemployment rate is low, generally there will be fewer vacancies.
No tenant wants to live in a dangerous area. With the availability of crime information online, prospective tenants may be deterred from renting your property if they see that vandalism, petty or serious crimes are common. Research crime rates in a prospective neighbourhood by conducting an online search, speaking to neighbours and contacting local police. Finding out how often police are nearby will help you gain a better sense of the neighbourhood’s safety.
If you cannot find access to crime rate information and are not able to speak to a local neighbour, we suggest the following;
Walkthrough the area - does it feel safe?
Are the properties in the area well maintained - if so this is a good sign of a safer neighbourhood?
Do you hear yelling and fighting from neighbours? If so, this could be a sign of future issues.
Find out who else is interested in the area. Check local news or contact the zoning department to find out about new developments in the neighbourhood. If there are many new housing developments, business parks or retail spaces coming soon, the area is likely booming.
Make note of any developments that might be replacing a neighbourhood amenity, like an apartment complex replacing a shopping mall. More rental units nearby could hurt your rental price and vacancy rate.
Another great tip is to check for new transit routes or train stops. Often, when a city is starting to boom, the city will upgrade the transit system to meet the higher demand of a growing city.
Each city will usually list on its website any infrastructure or new future developments that have been approved. You can review the approvals when deciding on where to buy your rental property.
Other factors to consider
You already know your investment range, but you should also have an idea of what kind of property you and the tenants you want. Do you buy a single-family home or a duplex with students? You may be open to multiple scenarios, but a wish list of features will be handy in starting your search.
You’ll also need to decide whether you’ll actively manage the property or plan to hire a property manager. This will impact location (if you need to be close) and cost (if you need to pay a manager).
While you may eventually work with a realtor to locate properties, it helps to research your own first. When you know what you want, you and your realtor can begin with your top selections and work until you find that perfect property.
Speak to your property manager and your realtor to find out what properties are the hottest. Ask them about these certain areas to ensure you buy a property type that is in demand.
Wrapping it all up
We have listed 6 Features Consistent with Profitable Rental Properties. Once you consider each one carefully, per property purchase, you can minimize your investment risk and improve cash flow. By knowing the basics, you can take this knowledge and invest in new cities that are not local to you and achieve success.
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