There are many reasons why someone might purchase a home with rental potential in mind. They may be planning a move to another part of the country in a few years, but need the home to pay for itself in the interim. Others may be planning to divide their time between two or more homes, and need the rental income from one or more of them to cover their expenses while they are away. Still others may be purchasing homes as an investment, in the hopes of selling them later for a profit.
Here’s what to consider when you’re buying with the possibility of renting the home out down the road.
Location and Rental Demand Go Hand in Hand
Rental demand can vary from neighborhood to neighborhood depending upon location to employment centers, to universities, to medical facilities, to commuter routes and to downtown areas. A property located near these amenities can lease quickly and obtain higher rental dollars than a property located in a far-off area.
For example, Frederick, MD, a growing city of about 70,000 with steady population growth has a diverse base of federal contractors and health care workers as well as a strong commute to Washington, D.C. Rental demand and pricing in most of the city’s established neighborhoods are generally strong.
Vacancy rates and current median rent for 2- and 3-bedroom homes for a 5-year average for the area can give a buyer a better sense of the current market and help them make a more informed decision about where to buy.
Property Features That Attract Tenants
Buyers should focus on the following factors that affect potential renters:
- Separate entrances: The ability to have renters live in a basement apartment, in-law suite, or an accessory dwelling unit as owner occupied rental can create a great deal of rental income without the owner having to leave their primary residence.
- Number of Bedrooms and Bathrooms: In evaluating the rental potential of properties, the number of bedrooms and bathrooms should not be overlooked. Three bedroom / two bathroom properties tend to attract the largest pool of renters including families and other working individuals looking for space to share with roommates.
- Parking availability: If possible, look for homes with dedicated off-street parking for tenants. This feature can have a significant impact on potential rental income.
- Low-maintenance exterior: Vinyl siding, architectural shingle roof, minimal landscaping.
- Modernized kitchen and bathroom: Renters place the greatest value on kitchen and bath finishes, so updating these spaces is one of the most reliable ways to command higher rent and generate more interest.
A house like this is ready to rent the moment the homeowner decides to list it, and its ability to command higher rent and attract more applicants is what makes it a genuinely good investment.
HOA Rules and Local Restrictions
An even more salient and often overlooked set of restrictions for potential landlords are those imposed by Homeowners Associations. Many such organizations in Maryland ban even short-term rentals through services such as Airbnb and VRBO. Some permit rentals but impose a waiting period on new owners or impose a cap on rental units within a community.
The Homeowners Association documents can be obtained from the Buyer’s Realtor or the Seller. Review the documents prior to submitting an offer and include language in the contract that states the Buyer will comply with all of the HOA governing documents as a condition subsequent to the purchase of the property. The HOA governing documents consist of the Declaration of Covenants, Conditions and Restrictions and any Rental Policies approved by the HOA Board from time to time. The HOA documents must be strictly complied with to avoid potential liability to the HOA and/or other community members.
Some local governments require short-term rental properties to obtain a license, restrict the number of people that can occupy a property, and require property owners to register their properties with the local government. These requirements can be identified prior to the purchase of a property by contacting the local government’s planning and zoning department.
Estimating Future Rent and Running the Numbers
It’s easy to be overly optimistic when projecting rental income, so don’t let that optimism inflate your numbers. Build a realistic model instead, with some extra room for error.
A practical approach includes:
- Researching current listings for comparable units in the area to arrive at a realistic figure for projected rent.
- Vacancy (1 month out of 12 in this example).
- Maintenance: Use National Association of Realtors guidance that suggests that for most properties, maintenance is 1-2% of the property’s purchase price each year.
- Utilities paid by the landlord, if property is rented in that configuration.
- Include the cost of the landlord’s insurance, which will increase over the owner-occupied cost.
By estimating out the carrying costs of a property, a prospective buyer can get a sense of just how much the income from a rental property will cover, and, more importantly, how little it will not cover in a less-than-ideal scenario.
What Tenants Actually Expect
A smart homeowner would note that the way one rents a home is changing just as fast as the housing market. What renters look for in a home today are vastly different from what they looked for even 10 years ago. When looking for a home to rent, today’s tenant has very specific expectations of what they want in a rental home.
- Reliable appliances and working HVAC systems.
- Clear communication during the leasing process.
- Prompt maintenance response after move-in.
- Clean, well-maintained common areas and exteriors.
Walking through this checklist before making an offer, rather than after closing, is what separates a property that rents itself from one where the buyer is scrambling to catch up once it’s already theirs.
The Realities of Becoming a Landlord
As noted above, the decision to self-manage a rental property is a legitimate one, but in most cases it is not passive. The owner of a rental property must understand the requirements of Maryland’s landlord-tenant law, how to handle security deposits, what constitutes a habitable rental unit and how to respond to a tenant’s request for repair in a timely manner. All of this information is detailed on the web site of the
Maryland Attorney General’s office.
In due course, owners realize that self-management of their rental property is more work than anticipated and turn over the management of their rental to a reputable professional property management company. Companies like JR Grace Realty approach this by handling the day-to-day details of tenant screening, lease administration, maintenance and repairs, leaving the owner to collect the rental income while a professional property manager manages the rest.
It is something to look into prior to a buyer deciding to become a landlord.
Thinking Ahead Before Making an Offer
It’s not wise to assume your housing plans are set in stone. Too many variables can affect them, so it’s smart to buy with rental potential in mind from the start, so you’re prepared if those plans change down the road.
Answering these questions before signing a purchase contract is far more valuable than discovering the answers after. With demand for homes in Frederick and for renters remaining strong, the careful home buyer can look to create opportunity in their primary residence as well as income in rental units.
Learn more about managing a rental out-of-state.
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Chris Highland, Associate Broker eXp Realty Maryland
