How to Estimate the Rental Potential of an Investment Property


There are many ways to evaluate the rental potential of a property. A quick online search can give you all the calculators and cost analysis you need to run the numbers, but that’s not the whole story. What other factors are important in evaluating a potential rental property? Read on for the top six things to consider or do before investing in a rental property.

  • Educate yourself FIRST. Do your homework, talk to other investors, read books, seek out as much information as you can before you even think about making an offer. It is not a decision to make on a whim, so the more you learn the better off you will be when it comes time to finance your investment. Learning from others’ experiences is the best way to avoid costly mistakes when investing in rental property.
  • Location, location, location. Whether you are buying your own home or an investment property, location is still the number one factor in purchasing. Are there good schools, low crime rates, quick access to highways and shopping in the area? Does the property look as well maintained as the rest of the houses in the neighborhood? Location will determine how much the property can be rented for as well as how long it will take to find and screen a tenant. Better locations can equal less time between tenants, which means more profit in your pocket.
  • Talk to the local real estate agents, preferably ones who have no vested interest in the potential property. No one knows the specific area better than a local real estate agent, so they can be a wealth of information on rental potential. You can talk to the agent selling the property as long as you realize that they may not be truly impartial; they are looking to sell the property, so keep that in mind. You can also use services that estimate fair market rentsin your zip code.
  • Check out the past rental history. What are similar nearby properties renting for? Have there been any upgrades to the property? If the property itself has never been rented, look at rental properties in the surrounding areas and then see what advantages/disadvantages your house may have compared to them. Factor these things in when considering how much rent you will be able to charge.
  • Are you ready to take on the responsibility of being a landlord and property manager? It’s more than just collecting a rent check every month…you will have to take care of the leaky roof, a broken garage door, a broken dishwasherand all other maintenance issues. If you prefer to hire a property management service, be sure to include that cost in your estimates because it will come out of your bottom line.
  • Ultimately, it does all come down to the numbers. You must find out what your Return on Investment (ROI) will be with this potential property. ROI is basically telling you how much money you can make based on what you invest. It’s a ratio calculated by dividing the dollar amount of the return by the total dollar amount you paid. Thus, Return Total Amount Out of Pocket = ROI. This bottom-line number is one that you should be 100 percent comfortable with, it should give you enough of a profit margin to pay for upkeep, repairs, and the like, and that will make your initial investment worth it.