4 Signs a Property Is Worth Buying and Renting Out

By Rudy Rudulph, November 28, 2016

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Have you ever had thoughts of becoming a landlord? If you have residual income and energy to follow through, there are plenty of townhomes, condos, and single family residences available in your real estate market. Below are a few indicators, that a rental property is primed for better returns.

1) The property rental makes money for you immediately

Your rental income, or (rent checks) should cover your costs upfront on renovations and upgrades that were made to the property being rented.

According to Jim Ludwick at MainStreet Financial Planning recommends looking for properties that will generate enough rent in 10 months to cover all costs, including mortgage payments, taxes, and insurance. Another popular rule of thumb is the “2% rule,” which holds that your monthly rent should be at least 2% of the total purchase price of a property. Look at comparable rental listings online to get a sense of what you could reasonably charge for rent. Then, try punching in your numbers, from your rent to mortgage to maintenance costs, into an online investment calculator.

2) Lower DOM Indicator

DOM stands for “days on market,” and refers to how long a rental home has been for sale. And if the DOM is constantly decreasing in a particular area or neighborhood, that’s a key harbinger that this particular housing market is heating up.

Also check current property rentals in the area. If current landlords are offering concessions to tenants, such as a free month of rent or a lower security deposit, those are signs that they’re having a hard time filling their rental houses.

3) Gourmet groceries nearby

Scouts for Whole Foods, Starbucks, and other high-end chains get paid a lot of money to research the up-and-coming neighborhoods with residents (aka your future tenants) who have the disposable income to support their stores. So, if you can buy heirloom tomatoes and a pour-over coffee in a five-block stretch, things are looking good. The presence of Trader Joe’s, Whole Foods, and Starbucks, in particular, bode well for real estate desirability.

Pay extra attention to the neighborhood and understand what’s going on there.  Research and find out what type of tenant the neighborhood and available property rental would attract.

4) A squeaky-clean tenant

If you’re inheriting tenants with the rental property you’re considering, don’t just trust that current landlord’s word that they “always pay on time.” Run a background check and a credit check on any current or potential tenants to see if there are credit issues or a history of evictions, and ask to see pay stubs or a 1099 to show the tenant has the enough income to cover the cost of living there.