HGTV renovation shows and hashtags like #ilivewhereyouvacation have created a lot of unrealistic expectations around investment property ownership. Property investment daydreaming leads people to shop for their first investments like they’re starring in a made-for-cable movie, not making a major financial decision.
If you live in a hot rental market, you learn how to spot these people. You see them looking around gated neighborhoods that have ultra-stringent rental rules, not realizing that the neighborhood association will stomp out their dream of passive income the minute their first Airbnb booking arrives. On the other side of the newbie-investor spectrum, you see them buying fixer-uppers that they have no idea how to fix -- perhaps hoping that future potential renters won’t notice the house’s water damage and dying HVAC system.
The community element of property investment
Spoiler alert: Renters notice things. Also, neighbors notice, building managers notice, and in the worst-case scenario, city building officials take notice. There are so many people who might take an obnoxious amount of interest in what you do with your investment property -- and your best intentions may not matter if you’re not in the right place.
Don’t believe it? Try setting up a nice grill and patio furniture in a building with strict rules around patio decoration or outdoor cooking. See how long this very renter-friendly amenity lasts before you get an official notice to remove or face a fine.
When you’re looking at a potential investment property, you shouldn’t be naively optimistic about anything. Not neighbors, renters, the future weather, potential profit margins, or the lifespan of appliances in the house. Be the opposite: pragmatic and solution-oriented. Determine what kind of property you have here, and figure out the personas of possible renters that might want such a property -- and what they’ll pay for it. Before you decide anything, evaluate the following elements carefully.
Look at the property…
1. Even in a nice neighborhood, houses still need updates… are you willing to do them?
A moderately-priced property in a neighborhood with instant appeal will likely have some flaws: worn carpet, faulty taps, water damage on the porch. The first thing to determine is, do some of those minor-looking flaws actually hint at a much larger problem? (Water damage might mean rot or mold) An inspection will find these issues, so then it’s up to you to look more closely and determine whether it’s worth fixing them.
If you’re buying in a desirable neighborhood, you might be tempted to put the place on the market with cosmetic flaws such as a stained carpet or a weedy brown front yard. Be mindful that if you’ve priced the rental on the medium-high-end of market value, people will bypass a place for these types of flaws unless you are in the most expensive markets. If you don’t make upgrades right away, you may wind up making them after the place sits on the market unoccupied for a couple of months.
2. Are you even allowed to make the updates that will attract renters?
Sometimes building systems and structure are so old that updates can’t be made even if you want to. Pipes might not allow for garbage disposals or dishwashers. Rickety window frames might not be in any kind of state to receive sturdy impact-glass windows. Being willing but unable to modernize a place brings a special kind of frustration to an ambitious investor.
3. Is the property safe and secure?
It’s not enough to tell prospective renters, “This location has a very low crime rate.” They want to know exactly what measures are in place to keep themselves and their belongings secure from break-ins or mischief. You should prioritize this too.
- Do you have a security system?
- How are the windows?
- What is the backdoor like?
- How many people have access to the gate code?
- Is there any kind of security patrol in the community?
Be prepared to answer all these questions and, if the absence of adequate security raises too many concerns, to update/upgrade gates, locks, and cameras as needed.
4. Is the property in a good neighborhood?
People’s definitions of “good neighborhood” tend to be a little flexible, depending on their age/economic status, what they’re used to, and their priorities. So you can be a bit more open in your search, and maybe take a calculated risk on an up-and-coming neighborhood or a property adjacent to a nice neighborhood. Make sure, though, that other benefits of the place (more space, lower cost, nice amenities) offset the less-than-ideal location.
5. What is the property convenient to?
This is extremely important to assess in a potential investment property if you’re planning to target renters that prioritize a place close to where they live or work. Many investors make great money renting workforce or student housing that’s decent and safe, but by no means Class A, to university students, hospital personnel, airline employees, or other groups that prize proximity.
Lately, one strategy of investors is to look for properties in cities where economically depressed neighborhoods near universities or medical centers have been designated Opportunity Zones -- experts say that tax incentives and eventual small business incentives from the Tax Cuts & Jobs Act can offset the medium-term effort of being in the first wave of neighborhood gentrification.
6. What kind of transportation is the property best suited to?
Knowing this is part of knowing what renter personas to target. If your building is public-transit-oriented, in a pedestrian-friendly neighborhood, then go after car-free potential tenants. If you’ve got parking, but the place is driving distance from everything, target renters who are used to driving everywhere. If your place is convenient to transit AND has a parking spot, you can charge a little extra.
7. Is the community investor-friendly?
This is a term you should learn immediately and assess all investment properties against for the entire time you own rental properties. If a community, city, or building doesn’t like investment properties, they can do a lot to slow down or halt upgrades, and to lessen a property’s appeal to renters. Some associations allow renters only after the property has been owner-occupied for two years, or they only allow it to be rented one time a year. A lot of places won’t allow short-term-rentals at all -- and regulation may extend this STR-banning practice across whole cities in the near future.
8. What is the building or community management company like to deal with?
You can often get a sense of this just from the site tour. If the security team is more interested in their own conversation than in helping you to the right place, or the building manager is mysteriously absent during office hours, note it in the “red flag” column. It might be a fluke -- but if similar things happen the next visit, it probably reflects how management runs the community.
9. Is this property in a NIMBY community?
NIMBY is real estate shorthand for “Not in my backyard!” and it typically means NO to all change. Did you hope to trim a tree? It’s protected. Did the neighborhood want to repair a cracked sidewalk on your street? It will disrupt the local fauna, so no. Did you perhaps want to gut-renovate a beautiful but decrepit home? It’s historic! Step away and let it rot!
If you are not a professional developer with patience, financial resources, and expertise at working with the city and community stakeholders, stay away from any property in a NIMBY neighborhood.
Realism and research lead to a solid investment
Do not let your daydreams guide a decision that could either move you up an income bracket or bankrupt you. Be analytical and scrupulous. Also, be realistic about what improvements need to be made, and the maximum rent you can charge before and after improvements. Read HOA bylaws with a magnifying glass. And if people with actual power over what you do in your property don’t like investors or renters, move on to the next listing.