Buy a Home in a Good Location
Remember the adage “Location, location, location.” Don’t buy a home in a troubled neighborhood where crime is high and then wonder why it’s difficult to rent. A good location is generally a desirable and popular neighborhood with good schools, high curb appeal, and evidence that homeowners display pride in owning their homes. A home in a neighborhood near busy intersections, train tracks, airports, or freeways will always have less value. Homes within a short commuting distance to centralized working locations—or near transportation to those employment hubs—are preferred.
Buy in a Neighborhood of Owner-Occupied Homes
The highest possible market value is typically obtained in a neighborhood of homes where homeowners reside. Renters will generally pay a premium to live among owners. Sometimes you can easily pick out the rental house on a street where mainly other homeowners live. Unfortunately, tenants don’t always maintain the yards in the same detailed condition as homeowners do. The home might also have signs of deferred maintenance, because tenants sometimes don’t report problems to the owners for fear that any repair costs could cause an owner to raise the rent.
Buy a Home With a Minimum of Three Bedrooms and Two Baths
A two-bedroom home is typically not hard to rent, but it is easier to rent one with three bedrooms. You’ll also be able to ask for a higher rental price for it. A potential tenant who needs a two-bedroom home might be tempted to pay a little more for a three-bedroom home, but a tenant who needs three or more bedrooms will not rent a two-bedroom house. The best resale value is also often found in homes with three or more bedrooms.
Buy a Newer Home
From an investment point of view, older homes built before 1950 are often better built, but newer homes require less maintenance. For example, you may not need to repair or replace appliances, water heaters, HVAC systems, roofing, plumbing, and electrical systems in a home built within the last five to 15 years. Newer homes typically don’t require retrofitting either, the way an older home might. Code requirements are sometimes grandfathered until a repair becomes necessary, especially regarding water-saving devices or low-energy items. Bear in mind that replacing a shake roof, for example, with a composition shingle roof, could involve removing the underlayment and installing a new layer of plywood or oriented strand board (OSB), which drives up the cost.
Know the Hidden Costs of Ownership
Before releasing home-buying contingencies, you want to know what you’re in for. Hidden costs of ownership can eat away at potential profits. Find out whether the home is insurable as a rental. If the home will be vacant for any length of time, find out if you can purchase vacant home insurance and how much that specialized policy will cost. Do you need earthquake or flood insurance? Examine the tax records to determine whether the tax rates include additional fees that don’t affect other homes nearby. Make sure that updates were permitted, especially if it appears that a previous owner might have done some remodeling without permits. Verify utility rates and types of utilities. An all-electric home, for example, might cost more to heat than a home on natural gas, and dual pane windows offer more insulation than single-pane windows. And here’s a bonus tip: If the home is located within a community regulated by a homeowner’s association (HOA), investigate any restrictions on short- or long-term rentals. The last thing you want to do is to buy a home, planning to rent it out, only to discover that your HOA prohibits you from doing so.
