Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

3 Factors That You Don't Realize Can Make Or Break Your Rental Property

In my cozy neighborhood in a quiet enclave of Chicago, we just got word that both a Gap (NYSE: GPS) and Target (NYSE: TGT) will be opening new stores.

The reaction was mixed.

Some said it was a loss of innocence for a neighborhood home to many private retailers. Other hailed it as the second coming of sliced bread: "Target? They have great deals, and I like their clothes."

Regardless of which reaction, anyone who owns real estate in our neighborhood just saw the price of their asset increase... just as it did when Starbucks (NASDAQ: SBUX) opened 10 years ago, Whole Foods (NASDAQ: WFM) eight years ago and an Anthropologie six years ago.

Does this sound like a neighborhood where rents are going up or down?

Landlords have been killing it.

In fact, my neighborhood doesn't stand alone. Rentals are exploding nationwide.

It's the perfect storm of lower home prices, combined with sky-high rents and an insatiable renter housing demand, and it has some of Wall Street's wealthiest firms salivating at the sheer profit potential.

This is a new phenomenon. Investing in real estate used to be done by thrify individuals, not by large corporations. But over the past year, that has all changed. And this sea change is opening the doors to some incredible investment opportunities for stock investors like you. My colleague Nathan Slaughter -- editor of StreetAuthority's High-Yield Investing newsletter -- has even found some under-the-radar investments that allow you to be a "virtual landlord" and collect yields of up to 8.6% without owning a single rental property. (Click through to hear more.)

Being an actual landlord can still be profitable, too, though. However, before investing in property, there are three things you need to know, and you won't find them without having a good look around. It isn't enough to have the inspector give the house a once-go-over or to have the property surveyed. These are tangibles you are going to have to find out yourself.

I'll tell you what they are because rental property investors don't want to find themselves saying, "I wish I had known that" after sinking a big investment into the most popular asset class.

Walk Score

The last time I checked gasoline wasn't getting any cheaper. That has people curbing the use of automobiles in favor of walking or biking to their favorite local hotspots. That trend toward fuel efficient and environmentally friendly transportation is already well in play and will only strengthen moving forward. And it's impacting real estate valuations. Rental properties close to cherished local amenities like a good coffee shop, tasty restaurant or convenient train station are in position to see outsized capital gains and premium rents.

Unemployment Rates

The national unemployment rate as reported by the Federal Bureau of Labor Statistics (BLS) is 7.2%. But if you break that average down on a state-to-state basis, there are sharp variations at the regional level. For example, the domestic natural gas boom has North Dakota reporting a country-leading unemployment rate of 3.0%. But the defunct manufacturing industry has left Detroit with a cringe-worthy unemployment rate topping 14%.

There are very specific regional employment and economic trends that will have a big impact on the long-term trajectory of rental demand and capital appreciation. Not all rental-property markets are made the same.

Crime Rates

Speaking of unemployment, areas with higher unemployment rates also tend to have higher crime rates. The implications here are serious for any prospective rental-property investor. Small differences in crime rates can have a big impact on demand for a rental and also peripheral expenses such as the cost of insurance, security systems and additional locks.

The Investing Answer: As with any successful investment, winning with a rental property requires serious diligence. Talk to existing rental property owners. Talk to people who live in a neighborhood that has your attention. Don't be afraid to put your feet on the ground and spend a day checking out the scene. That's the kind of market research that doesn't show up in statistics.

P.S. -- As I mentioned, Nathan Slaughter has found a way for you to collect "rents" as high as 8.6% -- and that's without owning a square foot of property. Read more about it here.