What Makes the Best Rental Property?

Over the past twenty years, Kim and I have bought a wide variety of investment homes – everything from a one-bedroom, one-bath duplex to a six-bedroom, four-bath McMansion. Experience has taught us what makes the best – and worst – rental property!

Jack Miller said: Everything else in real estate is harder than a house. With that said, Kim and I stay away from townhomes, condos, duplexes and apartment buildings. We’re not saying these are bad investments; it’s just that they require a lot of hands-on attention, and our goal is freedom, not a j-o-b.

When it comes to single-family homes, the most in-demand property is a three-bedroom, two-bath home…with a garage…without steps…on a level lot…in a nice, convenient neighborhood. We call these Walmart houses.

Think of a Walmart house this way: Go to a checkout register at Walmart that has ten people in line. You hold up a picture of your investment property and ask, “Who would like to live in this home?” You want eight out of ten hands to go up. Next – and this is the most important question of all – you ask, “Who can afford to live in this house?” The eight out of ten hands need to stay up. If several hands drop, then your rental property is too high-end – which means you’ll have fewer prospective tenants able to afford the monthly rent…and having fewer applicants is not better when it’s time to rent your property!

There’s another reason we don’t like high-end homes. Because of increased maintenance and repair costs, the returns are often lower than on a simple, single-family home. With a bigger house, there are more air conditioners to maintain, more shingles to replace, more walls to paint, plus the insurance and property taxes are more expensive.

Another thing we look for is a non-rental neighborhood. For example, not long ago I took a group of investors door-knocking in Tampa. We started off in a neighborhood where many of the residents were tenants. How did we know? First, they told us. Second, our eyes told us. The neighborhood was not well maintained – we saw too many un-kept houses and yards. Kim and I have learned to focus on subdivisions with mainly owner-occupant homes.

So why do we avoid houses that have steps? Kim and I are Baby Boomers. Because we’re fast approaching our sixties, climbing a bunch of steps to get to the bedroom – or the kitchen/den – has zero appeal. A lot of Boomers feel this exact same way. And here’s a trend we’ve noticed: When we put a stepless ranch on the market, a majority of the applicants are fellow Boomers. On the other hand, when we put a two-story home on the market, rarely do Boomers apply.  

Why is this a concern? Today, 10,000 Boomers will retire – and 10,000 will retire every day for the next sixteen years. This is a HUGE number that, as investors, we can’t ignore. Plus, there’s a problem on the horizon: Because of poor financial planning, 95% of Boomers can’t afford to retire and maintain their current lifestyle. This means a vast majority of Boomers will be selling their big homes, living off the proceeds and moving into smaller, more affordable rental homes.

Folks, this is a great time to own rental property!