Rental properties are a lucrative investment. In fact, according to ZipRecruiter, the average annual salary of real estate investors is $123,937. That’s more than the median salary in the United States.
If you’re looking to purchase an investment property in South Florida, you can look forward to a lifetime of rewards. However, you need to be sure that you’re buying the right rental property. Before you dive in, do your research so that you don’t end up making a catastrophic mistake.
Let’s take a look at the things you should consider when choosing an investment property. Later on, we’ll teach you how to conduct an investment property analysis.
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Evaluating a Rental Property’s Potential
The first thing you should do is evaluate the rental property’s potential. Ultimately, you’ll want to put your money into a property that makes money in return. Here are some of the things you need to consider when choosing a South Florida rental property:
The neighborhood where your rental property is located determines the types of tenants that it attracts. For instance, if your rental is in a college town, chances are, student tenants will dominate your pool of prospective tenants. Similarly, if your rental property is located near a top-rated school, you’ll likely lease it to families with young children.
#2 Crime Rate
Criminal activity can deter your prospective tenants. Ask your local police department for the area’s crime statistics. Check the rates for serious and petty crimes as well as for vandalism. If criminal activity is declining, this is a sign that investing in a property in that area isn’t entirely a bad idea. You should also check if there is a police presence in the community.
#3 Property Taxes
Property taxes differ depending on the area. This is because property taxes are based on real estate market conditions as well as the property’s assessed value. High property taxes aren’t always a bad thing especially if you can charge a higher rate. Tenants are less likely to complain about taxes if they’re living in a good neighborhood. If property taxes are high, you can expect to rent out your property to financially capable tenants.
#4 Job Market
Are there major companies that are moving near your community? This means that more tenants will flock to the area to take advantage of the influx of employment opportunities. When choosing an investment property, don’t forget to check with the Bureau of Labor Statistics (BLS). If your investment property is in an area with an excellent job market, you can expect rental rates to go up.
Are there gyms near your rental property? How about spas, restaurants, and movie theatres? People want easy access to amenities such as these, which is why you should set your sights on a rental property in an area that has it all. If you aren’t sure what amenities your neighborhood has, ask your property manager to list them down for you.
#6 Average Rent
Make sure your rental property can make enough money to cover taxes, mortgage payments, and other expenses. When buying a property, the seller will usually provide you with a pro forma, which details the rental income that it generates each month. If you don’t have access to this, you can always ask your property management company for the figures.
#7 Number of Vacancies
The higher the vacancies, the lower the rent. Ideally, you should purchase an investment property in an area that has a steady demand for rentals. This means staying away from seasonal properties such as vacation rentals. If the vacancies are low, you’ll be able to raise your rent.
Finding Data for Your Rental Property Analysis
If your seller doesn’t provide you with a pro forma, you can ask your property manager to look up figures from the Multiple Listing Service (MLS) or the public property records. You’ll need these metrics to conduct a comprehensive real estate analysis.
Conducting a Comparative Market Analysis (CMA)
A comparative market analysis (CMA) compares your property to similar properties in the community to calculate its fair market value. When conducting a CMA, look at recently sold properties that are similar to yours — these are also called “comps”.
It’s worth mentioning that a CMA isn’t the most accurate investment property analysis method. However, it does offer you an overview of how much you can expect to earn.
Calculating the Net Operating Income (NOI)
The net operating income (NOI) measures the amount of money the property will make after deducting the operating expenses. The formula is as follows:
Rental income + other income – operating expenses
Rental income refers to the income that you generate from rental payments alone. Other income refers to additional sources of income, such as income from parking and laundry if you’re renting out a condominium. Operating expenses include your utilities, repairs, maintenance, and so on.
Calculating the Cash-on-Cash Return
The cash-on-cash return estimates the return on investment (ROI). To calculate it, simply divide your NOI by how much you paid for the property, also known as your initial investment. The initial investment should include costs for repairs, closing costs, and other expenses.
Calculating the Capitalization Rate (Cap Rate)
The capitalization rate or “cap rate” lets you compare properties to pinpoint the most profitable one. To calculate the cap rate, divide your NOI by the property valuation. Remember, the higher the cap rate, the higher the reward and risk. As the property investor, it’s up to you to decide what cap rate you’re comfortable with.
If you’re a first-time landlord or property investor, understanding these figures can be confusing. That’s why we recommend partnering with a property management company like Luxury Property Care.
We’re a team of real estate professionals, accountants, attorneys, and investment advisers that work together to help you profit from your rental property. We’ll start by conducting an obligation-free assessment so that you can make sure that you’re putting your money in the right place.