Here’s What You Need to Avoid When Investing in a Rental Property

Rental properties are good investments, as they have the potential to generate passive income. However, there is a lot of research that has to be done before you investing in rental property. There are certain places that don’t allow for short-term (less than six months) rentals, and there are other places that do allow, but there are several factors that work against that location, making it a bad investment.

Mistakes to Avoid While Investing in Real Estate

Here’s what you should avoid when investing in rental property and what you should do instead.

An Undesirable Location

Neighborhoods with high vacancy rates

Location is everything when choosing a rental property. You’ll want to invest in a rental property that will attract tenants. A neighborhood with high vacancy rates isn’t one you’ll want to invest in, and it usually means that properties in that area aren’t renting well due to high prices or even high crime rates.

Specific types of neighborhoods will also determine what kinds of tenants are most likely to rent in that area. For example, if you’re looking for property in what is known as a retirement town, you’re likely to be renting to older individuals who are likely to stay where they are. If you’re in a college town, you’re likely to rent to college students who don’t usually stay in one location for a long period of time.

Places susceptible to natural disasters

Nature is everywhere, but some places see a lot more natural disasters than others. However, some places, like Florida and Los Angeles, still see a great number of tourists and people moving to these locations, despite the hurricanes and earthquakes, respectively. Just keep in mind that you’re going to need insurance specific to certain natural disasters, and that’s a cost you’ll have to deduct from what you expect to earn from tenants.

Investing in Commercial Real Estate First

That is, if you don’t know what you’re getting yourself into. When starting out in investing in rental properties, it is best to start with residential real estate (specifically, single-family homes or a condominium), as opposed to commercial real estate (hotels, shopping centers, and other places that conduct business).

Commercial Properties vs. Residential Properties

There are many pros of investing in commercial real estate, but new investors don’t normally start off with commercial properties. For example, commercial real estate investments usually bring in more money, but they’re associated with a higher risk. First-time investors should start with single-family homes, as they tend to attract long-term renters.

When to invest in commercial real estate

Once you’ve learned the ins and outs of investing in residential properties, you can certainly start looking into commercial real estate. It is, however, more expensive to invest in commercial properties than it is to invest in residential real estate, but there are lending companies that help with financing commercial real estate.

Other Factors to Consider

Property Taxes

Consider this in relation to a location’s vacancy rates. If the property taxes are higher, but the area sees long-term tenants, then this is still probably a good place to invest in.

The Job Market

If there’s the potential for more employment opportunities, then this is likely to be a place that will attract not just more tenants, but long-term tenants. Job statistics can be accessed through the U.S. Bureau of Labor.

School Districts

When a location has a good school nearby, it’s likely to attract families, and families (who are non-military) are likely to stick around for a longer period of time.

Current and Future Development

Pay attention to what’s already in the area: parks, movie theaters, and other forms of recreation. These things tend to attract long-term residents. Also, if there’s a lot of construction for new developments, that means that there is a lot of growth going on in that particular area. However, be sure that the growth is commercial (businesses) rather than residential (homes), as residential growth creates more competition for you.

The key thing to remember is to do your research on a particular area. You can find out a lot about a city or town by visiting their website, actually going to the city or town and exploring, or even researching the city at their local library.