Rental Property Research Methods
After deciding that you want to invest in a rental property, there are still many steps before you get the property's keys in your hands and you start making money.
One of the steps is to conduct thorough and comprehensive research on rental properties.
Although this sounds like a tedious part of your journey, there's no need to worry, we've got you covered.
In this guide, we will be explaining everything you need to do when researching your real estate opportunities, including our top tips.
To begin, let's take a step back, and discuss the things you need to do before starting your research.
Steps To Take Before Beginning Property Investment Research
Before conducting research on rental properties, it is crucial that you have certain things in order. Having these established will help you better target your research and make your time more effective.
So, let's get into all of the things that you should do before even beginning to do research on rental properties.
Set Clear Investment Goals and Objectives
Before beginning your search for a rental or investment property, it's important to set clear investment goals and objectives.
Consider factors such as your long-term financial goals, risk tolerance, and investment time horizon. Investors often think that a rental property is the best decision, but after considering their long-term goals, decide on something with less risk, like a real estate investment trust (REIT).
Some questions to ask yourself when setting your investment goals and objectives include:
- What are your long-term financial goals? Are you looking to generate steady rental income, achieve appreciation in property values, or both?
- What is your risk tolerance? Are you comfortable with higher levels of risk in exchange for potentially higher returns, or do you prefer a more conservative approach?
- What is your investment time horizon? Are you looking to hold onto the property for the long term, or do you have a shorter time frame in mind?
Setting these clear goals will make it much easier to direct your research and make sure that you are not wasting time.
Determine Your Budget and Financing Options
Once you have set your investment goals and objectives, the next step is to determine your budget and financing options. Some things to consider include:
- How much can you afford to spend on a property? This will depend on your income, debts, and other financial commitments.
- What type of financing options are available to you? This may include traditional mortgage financing, owner financing, or other options.
- What are the terms of the financing? This may include the interest rate, loan term, and down payment requirements.
Although budgets change and financing options can get much more complicated, having a good idea of what you're looking for will help narrow down the properties that you are researching.
Research and Understand the Local Real Estate Market
In our previous guide, we spoke about the importance of choosing the location of your rental property.
Now, you must become extremely familiar with the location's key real estate characteristics.
It's important to research and understand the local real estate market to determine the potential for rental income and appreciation. Some key factors to consider include:
Median home prices: Higher median home prices can indicate a strong demand for housing in the area and a higher potential for appreciation in property values.
Rental comps: Research the rent for similar properties in the area to determine the potential for rental income.
Economic indicators: Look for indicators of a strong local economy, such as low unemployment rates and a growing population, which can impact the demand for rental properties.
Market trends: Research trends in the local real estate market, including the direction of home prices and the volume of sales, to determine the potential for appreciation in property values.
After considering all of these factors, you can safely assume whether or not the location you chose is good for real estate investing or not.
So, after getting all of these things in order, you can move on to the thick of it - researching your investment properties.
10 Steps To Conducting Property Investment Research
When researching investment properties, it's helpful to have a concrete plan for the things you're looking for.
Although you may already have some of these done, you should make sure that every step is taken for each property that you look at, as each one will probably have different metrics.
So, without further ado, here are the 10 steps to conducting property investment research.
1. Identify and prioritize target markets or neighborhoods.
The first step in researching rental property investments is to identify and prioritize target markets or neighborhoods.
This may involve considering factors such as population growth, job market, and local amenities.
2. Research local economic and demographic trends.
In order to make a well-informed decision, it's important to understand the local economic and demographic trends in the area you are considering investing in.
Look into factors such as unemployment rates, median household income, and the local housing market.
3. Gather data on comparable properties and their rental rates.
Once you have identified a potential target market or neighborhood, the next step is to gather data on comparable properties and their rental rates.
This will give you an idea of the going rate for rental properties in the area and help you determine the potential demand for the property you are considering.
This approach is typically known as the sales comparison approach and is used to estimate the value of a property.
The idea is to find properties in the area with similar characteristics (size, age, features) and use that price as a basis for the subject property.
4. Determine the potential demand
In addition to gathering data on comparable properties, it's important to assess the local rental market and determine the potential demand for the property you are considering.
This may involve looking into factors such as the local vacancy rate and the number of rental properties available in the area.
5. Analyze the property's financials
Before making a decision on a rental property investment, it's important to thoroughly analyze the property's financials.
This includes understanding the property's expenses, such as property taxes, insurance, and maintenance costs, as well as determining the potential rental income.
This could be easier to find for a commercial property, but for residential properties, it can be much more difficult.
Once you have all of the property's financials in order, you can calculate important metrics like the net operating income.
6. Consider the property's proximity to local amenities.
The location of a rental property can have a significant impact on its demand and potential return on investment.
Consider factors such as the property's proximity to schools, public transportation, and local amenities when evaluating its potential as an investment.
7. Research trends and potential for price appreciation.
It's also important to research the local real estate market in order to understand trends and the potential for price appreciation.
This will help you determine the potential long-term value of the property and whether it may be a good investment.
8. Evaluate the condition of the property and the potential for repairs or renovations.
Before making a decision on a rental property investment, it's important to carefully evaluate the condition of the property and determine the potential for repairs or renovations.
This will help you understand the potential costs and time involved in maintaining the property.
9. Consider the property's potential for long-term appreciation or future development.
When evaluating the potential of a rental property investment, it's important to consider the property's potential for long-term appreciation or future development.
This may involve looking into factors such as the local housing market and potential for growth in the area.
10. Evaluate the property's risk and return potential compared to other investment options.
Finally, it's important to evaluate the risk and return potential of the property compared to other investment options. This will help you make an informed decision and choose the investment that is right
After following these steps, you should have narrowed down your search to a handful of properties, at most.
The next important step is to value the property as a real estate investment, which we will discuss in the next section.
How to Value Real Estate Investments
As a real estate investor, the last thing you want to do is overpay for a property or invest in a property with 0 return.
When it comes to evaluating the potential of a rental property investment, there are several key factors to consider. You want to make sure that you consider each one to make sure that you choose the most profitable option to invest in.
Assessing The Property's Condition & Need For Repairs
One of the first steps in evaluating a rental property investment is to assess the condition of the property and identify any needed repairs or updates.
This may involve inspecting the property yourself or hiring a professional to assess its condition.
It's important to be realistic about the cost of any needed repairs or updates, as they can significantly impact the profitability of the property.
By considering the condition of the property and any needed repairs or updates, you can get a better sense of the property's potential value.
Expected Return On Investment (ROI)
The ROI of a rental property investment is the percentage of the investment that is expected to be returned over a certain period of time.
To calculate the ROI of a potential rental property, you'll need to consider factors such as the purchase price, expected rental income, plus ongoing expenses and maintenance costs.
There are several different ways to calculate ROI, but one common method is to use the following formula:
ROI = (Net Profit / Total Investment) x 100
Net profit is the total rental income minus the ongoing expenses and maintenance costs.
The total investment is the purchase price of the property plus any additional costs, such as closing costs or renovations. This calculation is very common in residential and commercial real estate.
By calculating the expected ROI of a potential rental property, you can compare it to other investment options and determine whether it is a good fit for your financial goals.
In addition to considering the ROI of a potential rental property, it's also important to evaluate the potential cash flow of the property.
Cash flow is the amount of money that is generated from the property each month after deducting the ongoing expenses and maintenance costs.
One of the common ways to calculate the potential income for a rental property is by using the gross rent multiplier approach (GRM). This method values a rental property based on the sale price of the property compared to the annual rental income of the property.
By combining this method with others like cash on cash return and the capitalization rate, investors can determine whether it is a financially viable investment and whether it is capable of generating the income you need to meet your financial goals.
Potential For Appreciation & Other Long-Term Growth Opportunities
Consider the potential for appreciation and other long-term growth opportunities. In addition to the short-term cash flow and ROI of a rental property, it's also important to consider the potential for appreciation and other long-term growth opportunities.
This may involve looking into factors such as the local housing market, potential for development or gentrification in the area, and any other potential drivers of property value.
By investing in properties with the potential for long-term appreciation, you can increase the chances of a good return on your investment.
It's important to be cautious when considering the potential for appreciation, however, as there are no guarantees in the real estate market. It's always a good idea to consult with a professional and do thorough research before making any investment decisions.
Utilizing Online Resources
Utilize online resources and tools, such as property value estimators and real estate comps. There are a number of online resources and tools available to help you evaluate the potential value of a rental property investment. Some options to consider include:
- Property value estimators: These tools use algorithms and other data to estimate the value of a property based on factors such as location, size, and condition. While these estimators are not always accurate, they can be a useful starting point for determining a property's potential value.
- Real estate comps: Comps, or comparable properties, are properties in the same area that are similar in size, condition, and other characteristics. By researching comps in the area, you can get a sense of the going rate for properties like the one you are considering and how it compares in terms of value.
Consulting A Professional
Consult with a professional, such as a real estate agent or appraiser.
In addition to using online resources and tools, it can be helpful to consult with a professional when evaluating the potential value of a rental property investment. This could be a real estate agent, appraiser, or other professional with expertise in the local real estate market.
By consulting with a professional, you can get a more accurate assessment of the property's value and get guidance on the investment process. This can be especially useful if you are new to rental property investing or are unfamiliar with the local market.
After following these valuation methods and research steps, we are sure that you will find the best investment property for you.
However, if you haven't, you may want to consider looking over some of our tips for successfully finding investment properties.
Tips To Find Great Investment Properties
Sometimes, finding an investment property can seem impossible. However, by following some of these tips, we hope that it all becomes easier for you.
Don't rush the process
It's important to take the time to thoroughly research and analyze potential properties in order to make an informed decision.
This may involve gathering data on comparable properties, assessing the local rental market, and analyzing the property's financials. Don't be afraid to put in the time and effort to ensure that you are making a wise investment.
Everything can be negotiated
Once you have identified a potential property, don't be afraid to negotiate in order to get the best deal possible.
This may involve negotiating the purchase price or terms of the contract. It's important to be proactive and advocate for your own interests in order to secure a good deal on the property.
Look for distressed properties
Properties that are in need of repair or renovation can often be purchased at a discount, and fixing them up can increase their value. Just be sure to carefully assess the costs of renovations and make sure they will be worth it in the long run.
Stay patient and persistent
Finding the right investment property can take time, and you may have to look at many properties before you find the right one.
Stay patient and keep looking until you find a property that meets your needs and fits your investment goals.
Ready to Buy
At this point in the process, you're ready to purchase your investment property!
It is extremely important, especially at this point, to remain patient and make sure that you are thinking every single thing through.
Our next guide will go over everything you need to know about purchasing a rental property, so make sure to continue reading!