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 six other factors that indicate a property’s investment potential:
Most of the factors that impact your rental home’s profitability come down to neighborhood. The type of neighborhood 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 neighborhoods have their own personalities, and may attract tenants who simply want to say they live in the area. Other neighborhoods are defined by their job market (see more below).
Some neighborhoods 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.
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 neighborhood. However, high property taxes do not always spell a nice area. Do your research to learn what property taxes in an area have been in the past, and whether the city might be planning to raise those taxes in the future.
Area rental prices
Most of your profit will be earned from charging rent to your tenants, so 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 neighborhood. If you can find past rental rates, you can gauge whether the neighborhood 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.
If the 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.
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 neighborhood by conducting an online search, speaking to neighbors and contacting local police. Finding out how often police are nearby will help you gain a better sense of the neighborhood’s safety.
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 neighborhood. 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 neighborhood amenity, like an apartment complex replacing a shopping mall. More rental units nearby could hurt your rental price and vacancy rate.
Other factors to consider
You already know your investment range, but you should also have an idea of what kind of property and tenants you want, e.g. 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 do research on 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.