Most people get into real estate investing with the hopes of making a significant profit – but that profit is never guaranteed. If you want to be successful, you’ll need to study the variables associated with each property, including its ability to generate cash on a monthly basis, its potential to appreciate in value over a period of years, and the amount of money it’s going to cost you in the meantime.
So what are the variables you’ll need to consider in your effort to determine a property’s profitability?
Factors Influencing Monthly Income
Let’s start by looking at factors that will influence your monthly income. In other words, what factors will affect the amount of rent you can charge? A good rental estimate calculator can help you produce a reasonable estimate, often based on things like:
- Comparable properties in the area. What are other properties like this, in the same neighborhood, going for? If you have a 2-bedroom, 1,000 square foot apartment listed, its rent should be in line with the 2-bedroom, 1,000 square foot apartment across the street. Prices in a given neighborhood tend to rise or fall together.
- Renter demand. Rent prices in the area are often dictated in part by renter demand. In other words, how many people are competing to rent apartments and houses in this area? The more people you have applying to be tenants, the more you can justify charging in rent.
- Property age and quality. The age and quality of the property also matters. People are typically willing to pay more for a property that’s new, or one that’s been recently updated with modern features. Of course, it’s not always a good idea to renovate, since that will also increase your expenses.
- Size and space. The bigger the property is and the more bedrooms and bathrooms it has, the more you’ll be able to charge for rent. People are typically willing to pay more if it means having access to more space.
- Additional amenities. You might also be able to collect more monthly income if you have additional amenities or features that your tenants will appreciate. For example, additional parking or bonus storage space will justify higher rent prices.
Factors Influencing Expenses
Of course, just because you can charge a significant monthly rent doesn’t mean the property is going to be profitable automatically. You’ll also need to consider the variables that will influence your expenses, including:
- Purchase price and mortgage payment. Most property investors purchase a property with the help of a home loan, so your biggest monthly expenses will be your monthly mortgage payment, including principal and interest. Ideally, this will be significantly less than what you’re charging in rent; otherwise, your profitability will be blown immediately.
- Taxes, insurance, and other costs. You’ll also need to think about the property taxes you have to pay, the cost of your insurance as property owner, and other miscellaneous monthly expenses.
- Upgrades and improvements. If you plan on making major repairs, renovations, or upgrades to the property before housing tenants, you’ll need to factor in the costs of these as well. Sometimes, a $10,000 kitchen makeover can help you turn a profit in a few years; other times, it’s going to ruin your financial model.
- Repairs and maintenance. All homes are going to need periodic repairs and maintenance, with some homes needing more than others. It’s difficult to estimate this precisely, but some experts recommend setting aside 1 percent of the value of the home each year for maintenance.
Factors Influencing Long-Term Appreciation
Don’t forget that part of the value of your investment is its potential to appreciate in value over the course of years. This is tough to predict, especially because swings in the real estate market can be volatile, but these factors can help you make the best decision:
- Neighborhood quality. What’s the quality of this neighborhood and is it attracting lots of people to the area? Good neighborhoods tend to have low crime rates, good schools, access to employment opportunities, and ample convenient transportation.
- Prospects for the future. A good neighborhood in the present is always a good thing, but how might that change in the future? Does it look like crime is trending downward or upward? Are there more employment opportunities to come in the future?
Doing Your Research
Investing in rental property is a great strategy for wealth generation, but its success is far from guaranteed. If you want to maximize your chances of turning a profit, whether you’re more interested in short-term or long-term profitability, you’ll need to think carefully about the variables in play and do your research. The better informed your decisions are, the better your chances of success will be
