How to Evaluate Rental Property Effectively?

This might just be the right time to buy a rental property. Sure, interest rates are going up, so property prices will follow suit. However, the latest reports show that there has been no let-up in demand for office space over the last couple of months. This means that rental rates will continue to rise, largely negating the effects of inflation. However, before you sign a contract, you’d need to make sure that the investment is worth the risk and that there’s a good chance of making a profit.

You have probably analyzed the property prospectus in some detail already. However, there are some key factors that you may need to investigate. So it is important that you have a checklist of your own for what to look for before deciding where to invest.

In this blog, we look at the key factors to consider when investing in a rental property.

Physical condition

Maintenance is a huge part of any property owner’s day-to-day responsibilities. The first thing to check is whether the building is in good shape. This includes electrical, plumbing, heating, ventilation and air conditioning, etc. Hire a commercial property inspector who will assess your property and give you a detailed report on what needs fixing. Based on the assessment, work out a plan for repairs and improvements as may be required.

The Neighborhood

The key is higher rentals, and more profit is ensuring the property is in a location with good amenities and low property taxes. This is not limited to transportation, healthcare, and other public infrastructure. You should also analyze the job growth rate, mortgage rates, business sentiment, and crime rate for the city/state where your property is located.

Supply and Demand

Are there other properties nearby that might compete for business with the one you are considering? Make sure you check open listings for commercial rental properties in the immediate neighborhood. Don’t just look for similar properties –  a bunch of smaller buildings could also present a significant challenge. 

If there are no takers for most vacant units, it could indicate poor demand. Be sure to check what the typical demand cycle is like. If you ascertain it is not a seasonal lull, you’ll need to spend more on marketing or cut your rental rates to fill those units.

Potential Revenue

Check the projected ROI calculations given in the offer prospectus and see whether they add up. The key factors to look for include cash flow, capitalization rate, price appreciation, and net operating income. Benchmark the numbers against other properties in the neighborhood, and you’ll know whether the deal will be worth it. 

If you’re a first-time investor, it is best to bring in an experienced financial advisor or broker to help you make an objective decision based on numbers.

Property Management

If you don’t fancy running after tenants for rent or dealing with repairs, you can either hire a property manager or, better yet, invest in a DST. A property manager can greatly help, especially if you own more than one property. However, you are still responsible for paying taxes, promotions, renewing licenses, etc. All of this can take up a lot of your time.

A DST is ideal if you only want a passive income stream minus the hassles of property management. DSTs offer steady returns of up to 6% to 8% monthly, in addition to a significant upside on the eventual sale of the property. They are managed by professionals, which makes it all the more worthwhile.

Last Words

The real estate market is dynamic. It is important that you work with an experienced financial advisor when buying an investment property. True North is an experienced real estate solutions provider trusted by customers across the country. Our team can help de-risk your portfolio and increase ROI. For more information, contact our team today!

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