Buying a home to rent out is very different from buying a home to live in yourself. While a lot of the same criteria still apply, you need to be more rigorous about the practicalities associated with the rental home, including the legal and financial ones. With that in mind, here are three questions to ask when viewing a rental home.
Who is your tenant?
If a property has potential as a rental home, then you should be able to identify at least one potential tenant group just by looking at the listing. It’s fine to look at properties that will only attract tenants after work has been done on them. In fact, this can be a great way to raise your yield and benefit from capital appreciation.
By contrast, it’s very risky to buy a property without a clear (potential) appeal to at least one target market. It would typically have to be very affordable to justify the gamble. Remember, you’d much rather be in a position of selecting tenants carefully than having to take who you can get and be grateful for them.
What condition is the property in?
If you’re going to buy a fixer-upper then do it with your eyes open. Make sure that you fully understand not just the scope of the necessary work but also any legalities associated with it. For example, will you need any permits to do anything you consider necessary to make the property suitable for tenants? If so, how sure are you that you can get them?
Not to put too fine a point on the matter, you also need to be realistic about your own abilities as a project manager and/or a DIYer. In fact, even if you have the abilities, you need to think about whether or not the project is worth your time.
If you’re buying a property in move-in condition (or close to it), then think about ongoing maintenance and repairs. It’s also worth considering energy efficiency. Lower bills are attractive to tenants.
What’s more, it’s becoming increasingly common for governments to start mandating minimum standards of energy efficiency in rental properties. In general, this is partly because of environmental objectives and partly for tenant protection. These standards are likely to become stricter in the future, and you need to be aware of them.
What’s the local area like?
This is often the make-or-break question for rental properties. It isn’t just about finding locations with an obvious tenant base: also about finding locations with the right level of appeal at the right price.
For example, areas with popular colleges and universities will always have demand but that will be reflected in the price. This can make it extremely difficult, but not impossible, to achieve either a respectable yield or decent capital appreciation.
Finding bargains means keeping a close eye on the local market and being ready (and able) to move quickly. If you’re on a lower budget or want to spend less time property-hunting, then it’s generally best to look for properties in more up-and-coming areas. These are the types of places that are starting to have more mainstream appeal but are still priced quite affordably.