Buying The Right Rental Properties

Making a profit in the residential rental business starts with buying the right rental properties.  This may seem obvious, but far too often new and experienced investors alike buy properties that simply don’t meet enough of their own investment criteria to result in an acceptable level of profitability.  They are lured into making the purchase by one or two good features and figure they can overcome the rest… somehow.  Let’s take a look at a simple property evaluation framework that focuses on location, grounds and structures, and financials to assist with buying the right rental properties for each of our unique situations.

Buying The Right Rental Properties: Location

Location is the primary influence on a rental purchase because it directly impacts almost all other selection criteria.  Green lining is a useful tool to help focus on just those properties that fit within our location selection criteria.  After we’ve considered every aspect of location, we’ll literally draw a green line around the neighborhoods that our research indicates are most likely to provide the best return on investment, both in rents and growth in asset value (see map for one example of my several green line rental neighborhoods in Palo Alto, CA).  We’ll set up automatic email alerts to notify us immediately when properties in our green line neighborhoods come on the market and we’ll walk the neighborhood looking for un-listed properties that might be candidates for an unsolicited offer.  We’ll consider properties outside our green lines on a case-by-case basis, but only if they meet the same criteria we’ve established for our green line neighborhoods.

Buying The Right Rental Properties: Grounds and Structures

When evaluating the physical features of a property we’re mostly concerned with condition and configuration.  If the grounds and structures require work, we’ll determine if the costs to bring them up to our standards are financially viable (meet ROI targets).  We’ll also estimate demand for the property’s current configuration.  In most markets a three bedroom, two bath detached home is the easiest to rent and provides the best return on investment.  Our neighborhood research will determine the most profitable configuration we should look for as an investment.

Buying The Right Rental Properties: Financials

Rental property financials can be simply broken down into acquisition, operating and exit.  Unless we’re investing purely for short term value appreciation (flipping), our acquisition and operating costs and rental income should pencil out to a return that meets our minimum investment goals.  But we should also not forget that a time may come when we either want or need to exit the investment.  Our location analysis should have created green lines around neighborhoods that are likely to appreciate.  A heat map (see example, click to enlarge) is a useful tool for estimating future appreciation based upon most recent changes in property values and prices.  One of our financial goals should be to maintain sufficient equity in the property so that a sale will always add to the total profitability of the investment.

John A. Souerbry & Associates  Silicon Valley, Wine Country, East Bay (CalBRE 01370983)