Real Estate Investing Real Estate Tips |6 min read

How to Pick a Real Estate Rental Property: 7 Critical Points

Last updated November 18, 2024

Knowing how to pick a real estate rental property is an art. There are certain measures of what makes a good investment property that can make or break your success. They could be the difference between profits and peril. So, check that you’ve left no stone unturned below.

Main Takeaways

Choose your real estate rental property based on how much it meets the needs of tenants in your specific location, and how tenant-friendly its neighborhood is.
Also, assess your target location’s level of tenant demand, local laws and taxes, and upcoming developments.
Other critical features of what makes a good investment property are how its gross income, net operating income, cap rate, cash flow, and return on investment pan out.

Is Your Neighborhood Tenant Friendly?
Do Your Property’s Features Match What Local Tenants Want?
Does Your Target Location Have Sufficient Tenant Demand?
Is the Property in Good Condition?
What Are Local Laws and Property Taxes Like?
Are There Many Upcoming Developments?
How Does the Property Analysis Look?

Is Your Neighborhood Tenant-Friendly?

A guidepost leading someone to Fairfax, VA. In terms of how to pick a rental property, your target neighborhood must pass the test. A good neighborhood is a core part of what makes a good investment property, period. So, it doesn’t check these boxes, our property managers in Northern Virginia suggest you choose another one:

Provides close access to basic amenities: If your target location doesn’t have basic facilities like gas stations, grocery stores, and banks, it makes it inconvenient for tenants. Furthermore, if it doesn’t offer easy transportation to places, that could curb tenants’ enthusiasm.
Holds a low crime rate: Needless to say, areas with high crime rates will drive away potential tenants.
Has a thriving job market: Many people move because they have new jobs. If there’s a dearth of companies and jobs in your target location, fewer people could flock there.
Maintains a Healthy Economy: People will be less willing to live in your target location—or pay good prices for living there—if the local economy is doing poorly.
Schools are High Quality: Many families place special emphasis on the quality of a location’s schools. As a result, districts with poorer scores may be unappealing to them.

Do Your Property’s Features Match What Local Tenants Want?

One problem in deciding what makes a good investment property is that there is no one-size-fits-all property. Each area’s tenants have different needs based on:

Area Demographics: Consider a small town filled with families raising young children. Many tenants there may want to settle down in a single-family home. On the other hand, emerging city professionals may gravitate towards small, cost-efficient apartments. All in all, people’s career paths and life paths can dictate their choices.
Location Characteristics: An area’s traits can impact what tenants want. For instance, if a location is near the beach, tenants may vie for rentals nearby. Or, if it’s just on the cusp of a city, tenants may prioritize proximity to certain city highlights.
Day-to-Day Needs: That said, there are amenities virtually everyone wants across the board, like private parking, washers and dryers, and air conditioning. All in all, focus on boosting these features to attract tenants’ attention.

Does Your Target Location Have Sufficient Tenant Demand?

A toy wooden house. It doesn’t matter how prime a real estate rental property is if there’s insufficient demand for it in the first place. Before picking an area, make sure there is a solid market for it. Do this by looking into the rental rates of similar properties nearby. After all, areas with low demand can increase the risk of high vacancies.

Is the Property in Good Condition?

You don’t want to waste precious time fixing a real estate rental property from scratch. So, you may want to hire professionals to ensure they pass these tests:

Isn’t Too Old: An old property can encounter more pitfalls as it naturally declines with age. It may rack up repair costs throughout the years.
Has a Stable Roof: If your roof is weak or damaged, it may be in danger of collapsing altogether. Even worse, it may indicate further structural issues.
Electrical Systems are In Order: A faulty electrical system could result in injury or even death. Always check to see that everything is working according to the National Electric Code.
Plumbing Systems are Working: Defective plumbing systems can be ineffective at best, and dangerous at worst. They can harbor mold and lead, cause flooding, or even catch fire.

While you may be able to repair some of these issues, you’ll need to weigh whether the property’s potential is worth those costs. As such, your findings could determine your purchase decision.

What Are Local Laws and Property Taxes Like?

The quest of how to pick a rental property doesn’t end with the property itself. Each location has unique rental laws on state and local levels alike. On that note, you should research:

Your area’s laws: Ensure they don’t interrupt your business and are ones you can easily comply with.
Your location’s taxes: All locations have different property taxes. So, you should check that yours are affordable. Or, if they’re on the expensive side, see if you could provide a high enough rental rate to still profit, yet reasonable enough to keep tenants. Also, you should see which real estate tax benefits you’re eligible for. These could offset some of your costs.

Are There Many Upcoming Developments?

A man checking the structural integrity of a roof. Another tip for how to pick an investment property is gauging the quality of incoming development projects. If promising projects abound, it could attract tenants. As an example, if a huge factory is set to open soon, many workers may move nearby.

However, developments with negative impacts may scare away tenants. For instance, if a crucial bridge is under construction for a year, tenants may avoid migrating there in the meantime.

How Does the Property Analysis Look?

You should crunch the following equations to see if it meets the standards of what makes a good investment property:

Tenant Rent Payments + Utilities + Fees + Other Income Sources = Gross Income
Income – Operating Costs (Mortgage payments, utilities, maintenance, insurance, taxes, etc.) = Net Operating Income
Net Operating Income / Property Price = Cap Rate
Income – Operating Costs = Cash Flow
Cash Flow / Investment Expenses = Return on Investment

If the results just aren’t great, it means you may not benefit from investing in your eyed real estate rental property. If that’s the case, you should consider pivoting to another property and/or location.

Simplify Your Real Estate Rental Property with BMG Northern Virginia

You should choose your real estate rental property based on its neighborhood, amenities, demand, governing laws, and other key measures. By knowing how to pick a rental property thoroughly, you can set yourself up for success.

However, your decision-making doesn’t end with the property purchase. When you become a landlord, you have to consider legal compliance, tenant criminal screenings, repairs, and other responsibilities. Even worse, just one mistake could have an enormous impact. You could end up in legal or financial trouble. Most landlords can’t afford to make those missteps. That’s why so many of them hire professional property managers.

Professional property managers are specially trained to implement real estate industry best practices. They oversee a property’s operations to ensure everything is running as it should. These tasks include: