Recently a colleague asked me what she should be looking for in a cash flow positive investment property. She learned that I own two rental properties and she wanted to know why I brought them. I was slightly taken back because I didn’t intend to purchase these 2 homes as rental properties initially. Circumstances (aka: my sister’s life changing decision and my husband obsession of building a family dream home) got me there. Nevertheless, I ended up with 2 rental properties and I have got decent return on my investment.
In my opinion, the criteria for buying a rental property with potential for positive cashflow is almost the same as buying a home that you will live in. In the last 3 months, I have been actively hunting for the 4th property adding to my growing real estate portfolio, and I use the same criteria that I always use to buy a house.
Here is my checklist when hunting for that perfect real estate investment property:
1- Employment Opportunities
Whether you buy a rental or a residence, locations with a growing job market is a good one to have on the list. If it is a rental, your tenant will most likely want to be where the jobs are. And so do you if you want to spend less time to travel to work. Proximity to where hot job market is something that all of us will want. For Canadian, you can visit Statistics Canada for reliable data on the labour market for the area you are considering. If you are an America, take a look at www.usa.gov/statistics. Pay attention to the news. If a large corporation moving to the area, people will follow. For example, when Amazon announces the site of their next head office, I am sure the price of house and rent will rise substantially in the lucky city that Jeff Bezos decides upon. If you want to rent to students then college towns or areas near a popular university is highly recommended. A friend of mine owns three condos locates within 15 minutes walk of a university) and he had made good returns on these 3 investments.
2- Location, Location, Location
It is always about the L word. You can change the house interior or even rebuild it, but you can’t change its location. Take a good look at criteria, such as proximity to transportation such as highway access and public transportation, local restaurants, shopping, library, hospital and other amenities. If you want to rent to student, then a location close to university and college would be ideal. The more central the location, the greater the demand.
3 – Safety
Safety is a number 1 on the list for all of us because no one wants to live in an unsafe neighbourhood. Statistics Canada and www.usa.gov/statistics are good sources of data for this. I went one step further by going straight into the local police department. The officers whom I spoke to were great and very helpful. They gave me a lot of goof information on type of crimes in the area as well as trouble spots. Though I was quite sure that they thought that I was nut, they kept it to themselves.
4 – Amenities
People want to have fun. I am sure you would prefer place where you can shop, enjoy a nice day in the park, movie theatre, or have great restaurants. And so, will your tenants. A neighborhood with good and variety of amenities tends to attract more tenants.
5 – Rent price
This is an important one. You need to know the average rental rates are in the area because you need to do a cash flow calculation. If you don’t want to have a shortfall (i.e.: negative cash flow) from your rental property, do the research so you are clear on rental property monthly expenses: mortgage payment, utilities, insurance, property tax and potential rent income. These are the information you will need to get the right answer. Always use the lowest rent income. It is the lender in me talking! I always plan for the worst and hope for the best. If I budget for the lowest rent income based on the area’s statistic, I will be break even at the least. If I end rent out for more than that, then I am golden! Your real estate agent is a good source for this information. I don’t use real estate agent, so I use MLS listing, Zolo and even Kijiji to find the average rent price in the area.
6 – Schools
If you are a parent, I would bet that a good school zone is top priority for you. For a long-time, there were a lot of parents in Toronto would rent a tiny place in a top school area because they wanted their kids in these prestigious public school. No, they didn’t live there, they just “fake” rent a place in the good school zone so their kids would have a better education. The extend that a parent will go for their kid is limitless. I don’t judge these parents because I would probably commit the same fraud for the sake of my daughter’s education and potential advancement. For Canadians, check out: https://www.fraserinstitute.org. Fraser Ins. is a realizable source for Canadian public-school ranking. I came across this site for Americans: https://www.greatschools.org. This organization provides review and rating on US private and public schools.
7 – Future Development
What developments are planned for the area which would positively or negatively impact the value of your investment property? I strike gold when the city announced a multi-billions budget to build and expand the public transportation line across the city and all 3 of my properties locates within the area of development. Since the announcement, the rent price and asking price of house in my areas rocketed. The neighborhood is going through a major transformation. The only drawback is we are also right in the middle of the construction zone, but no pain – no gain. I will swallow this short-term pain for greater gain in a near future. So, a neighbourhood in the early stages of gentrification or transformation will likely result in a faster and higher appreciation for your investment property.
8 – Housing Inventory
This is especially true when you buy a rental. If there are a lot of excess inventory in the area, you may have to lower your rent price because you will have more competitors and renters have more to choose from. So, make sure you look at market trends for the last 2 years for accuracy.
9 – Property Taxes
Yuk! The tax man will get you and this cost will impact your cashflow calculation so be sure to review the taxes and the current market value assessments. For Ontario residents, check out www.mpac.ca. If you live in BC, Canada then check out: www.bcassessment.ca/. Alberta residents can find information on: www.calgary.ca/PDA/Assessment/Pages/Property-Assessment.aspx. Each province in Canada has their own municipal property assessment site, I list the top 3 only. You can do a quick Google search and find the assessment site for your location. Bless Google! Regrettably, I don’t have a site for US.
It is a long list because I like to know exactly what I get myself into before making the purchase decision. Real estate investment takes a lot of money and commitment, so it is totally worth your effort to take the time and do the research before letting go of your bundle of cash. Being a landlord is not easy and it takes up a lot of your time, but you will gain a good return if you willing to invest your time and effort.