If you want to be a successful rental property investor, you need to buy good rental properties.
Good rental properties equal good tenants.
Good tenants equal less headaches.
Less headaches equal a longer holding period.
A longer holding period equals more cash flow, appreciation, debt pay-down, and tax benefits.
Add it all up and that equals more financial freedom.
And, it all starts with buying the right property.
How do I know if I’m buying the right property?
One of the biggest mistakes that beginners make is buying bad rental properties. The reality is that most properties that hit the market are not good rental properties.
I typically look at hundreds of properties online before finding any that are even worth walking through. Of the ones I walk through, less than 10% are worth buying.
Don’t waste your time by running the numbers on every property that hits the market. The numbers only tell part of the story, anyways.
Instead, the first step is to develop and commit to specific criteria for attractive properties in your market.
If a property does not meet your criteria, move on.
This will save you precious time, especially important if you are still working a full-time job.
It will also save you from the disappointment of visiting properties that looked good on paper but failed to meet your other requirements.
So, how do you develop a set of standards for quality rental properties in your market?
Use common sense and your own life experiences to develop criteria for your market.
Obviously, every market is different. Don’t believe anyone who tells you they have a one-size-fits-all solution for evaluating properties. What works in Chicago won’t necessarily work in Los Angeles.
However, regardless of what market you’re in, you can and should use common sense and your own life experiences to evaluate rental properties.
Don’t overcomplicate this part.
Before you do anything else, think about what you would personally want in a rental property.
Forget about complex formulas and deal metrics. We’ll get to the numbers soon enough.
Start with a basic question:
What would I want if I were a renter in this market?
Before anything else, write down a list of the most important features that you would want in an apartment. Then, use that list as a guide to finding the right kind of properties.
By the way, using your own common sense is one of the best parts about investing in real estate. You don’t need an advanced degree or a background in real estate.
We all have some idea of what makes a neighborhood a good place to live. The same goes for what makes an apartment a good apartment.
We may not always agree on what those things are, and that’s OK. It may be for a simple reason, like we are not targeting the same potential tenant pool.
The bottom line is you should absolutely use your common sense and life experiences to help formulate your investing strategy.
Ask yourself what you would want in an apartment. Don’t waste your time running the numbers on any property that doesn’t match your criteria.
I prefer to invest in properties that make sense to me.
Warren Buffett has famously said that he does not invest in companies or products that he doesn’t understand.
We can apply that same logic to rental properties. Invest in properties that inherently make sense to you.
If you are a buy-and-hold investor like I am, you are going to be dealing with a certain tenant pool in your market for years to come. You want to make sure that you understand that tenant pool so you can buy properties that will be appealing to them.
You also want to be able to effectively communicate with prospective applicants and current tenants. The best way to ensure that happens is by investing in markets that you understand.
Work with a real estate broker and don’t be afraid to ask for help.
If you’re having trouble identifying the key factors to look out for in your market, ask around.
Talk to your colleagues and friends about what people in your target demographic look for in an apartment. Most of us tend to want the same things.
Of course, don’t underestimate the importance of working with a good real estate broker.
A good real estate broker can help you come up with a list of the most desirable features for renters in your market.
My wife and I have worked with the same broker for almost a decade now. He’s been a mentor to us and helped us come up with our list of key factors. More on that below.
He also knows exactly what we want in a property and doesn’t waste our time with properties that don’t match our criteria.
Having a good broker on your team is essential if you want to be a successful investor.
How I’ve used my life experiences to target rental properties in Chicago.
I invest in a Chicago neighborhood that typically attracts young professionals in their 20s and early 30s.
Why do I target young professionals in Chicago?
Well, I am one.
OK, fine.
I used to be one. Oof.
As a young professional in Chicago, I rented apartments throughout the city for nearly 15 years. Based on my own experiences, I have a good idea of what that demographic is looking for in an apartment.
I believe that gives me an advantage in targeting the right kinds of properties.
Plus, I teach nearly 100 law students each year and work with young professionals at my law firm. It’s a demographic that I’m comfortable with and still have a good understanding of what matters in a rental apartment.
Besides my personal experiences, why else do I target young professionals?
Generally speaking, young professionals earn consistent paychecks, are respectful to apartments, and are too busy to complain about minor issues.
All good things, as far as I’m concerned.
Location, location, location.
We’ve all heard the number one rule in real estate:
Location, location, location.
While a number of factors combine to make particular locations attractive, I’ll highlight one factor that’s very important to me in the Chicago market.
First, for a bit of context.
As mentioned earlier, I target properties in Chicago that would be attractive to young professionals.
Traditionally in Chicago, young professionals commute to office buildings in The Loop (Chicago’s downtown, central business district) via public transportation.
Yes, even in the “work from home” era, most young professionals living in Chicago commute downtown at least a couple days each week.
Since I know my ideal tenant likely commutes downtown, I look for properties that make commuting easier.
That means targeting properties near public transportation.
More specifically, I target properties within a half mile of the L (Chicago’s train system, short for “elevated.”)
I target properties close to public transportation because of my own experiences as a renter and because of what I’ve learned from potential tenants.
When I was renting apartments in Chicago, I always wanted to be close to the L. There’s nothing worse than walking 20 minutes to a train when it’s 10 degrees or 90 degrees outside.
It makes sense that now as an investor, I should target these same types of apartments close to public transportation.
Having done hundreds of apartment showings over the years, I’m confident that young professionals want to live close to public transportation.
I believe that the most desirable properties for young professionals are the ones close enough to an L station that people can walk there in 10 minutes or less.
Plus, coffee shops, restaurants, shops and other attractive offerings tend to be located near L stations.
So, in terms of location, proximity to the L is one of the most important factors for me.
No matter how attractive a property looks online, I’m not interested if it doesn’t satisfy this requirement.
What are some of my other top requirements for a rental property?
What I look for in a rental property may be different from what you look for. Use your own life experiences and common sense to decide if these elements would be beneficial in your market.
My wife and I have relied on our own life experiences, coupled with advice from our real estate broker, to come up with this list.
It’s not an exhaustive list, but here are some of the most important factors we evaluate when considering rental properties in Chicago:
- Location, location, location. See above. Proximity to the L and social life (coffee shops, restaurants, bars, etc.) are crucial. Most of the young professionals we rent to are still in the “going out” phase of life. They want to live in fun neighborhoods so they can enjoy themselves when they’re not working. They typically stay in our apartments for 2-3 years, oftentimes before buying a place of their own and “settling down.”
- Taxes. Property taxes can eat away your cash flow. We have high property taxes in Chicago across the board, but taxes vary widely from neighborhood to neighborhood. I look for properties in areas that have more attractive taxes.
- Big bedrooms. One of the most common questions I get when I do apartment showings is, “Can I fit a king size bed in here?” People love big beds these days. This can be a challenge considering Chicago’s standard 25-foot wide lot. I look for properties with a minimum bedroom size of 10 x 10.
- Outdoor space. Young professionals want to have outdoor space, even if they never use it. When I was a renter, I always wanted an apartment with a balcony for my grill. It didn’t matter to me that I only used it a handful of times each year. Maybe having outdoor space made me feel more grown up?
- Parking. Even though Chicago is a very public transit-friendly city, people still like having cars. Because most young professionals aren’t using their cars every day, they want to keep it safe in a dedicated parking space.
There are certainly other factors we consider, but these are some of the first things I’m looking for when I look through listings on the internet.
These factors were important to me when I was a renter and are still important to the young professionals I rent to today.
While I don’t invest in other cities besides Chicago, I imagine these factors would also be important for young professionals everywhere.
What is your specific criteria for rental properties?
The fist step in purchasing good rental properties is having a set of specific criteria that match your needs and market.
Don’t overcomplicate it. Use your common sense and life experiences as a framework.
Run your criteria by your real estate broker and other investors in your market.
Only after you have come up with a list of important features should you worry about running the numbers.
Whether you currently own rental properties or are hoping to get started, what factors are most important in your market?
Let us know in the comments below.
Leave a Reply