Investors that have decided to invest in rental property have usually weighed the pros and cons of this type of investment versus other investment types. Although many people can succeed investing in real estate, investing in rental property isn’t for everyone. Real estate has proven to be a way to build significant wealth and can generate income, significant tax advantages and long-term appreciation. However, it is not the right decision for everyone. Questions like do you have enough time to devote to the maintenance of the property, are you comfortable trouble shooting or hiring a property manager are all questions that should be answered before deciding on this type of investment.
Rental property has always been recognized as a sound investment when planned for and researched properly. The most important factors to reap the benefits of this investment are the choice of the rental property itself and the projected value, income and associated costs to acquire and maintain the property.
Choosing the right property is critical in making this investment decision. The following factors should be taken into account when deciding which property to buy:
- Schools: Rental homes featuring two or more bedrooms will attract families—and that means they will likely have children in school. If a school is nearby the home, it’s likely to be that much more popular with family tenants. In addition, school ratings can be a deciding factor in what home people would want to rent.
- Crime: Crime-prone neighborhoods can have higher turnover and longer vacancy rates, so a bargain purchase price may be less of a bargain than you had hoped for.
- Commute: Is there public transportation? Is the property a long commute from the commercial center of town? Many prospective tenants begin their housing search with their workplace as the center point. Renters will consider this before signing a lease—and as an investor you should take this into consideration as well before buying a rental property.
- Neighborhood: Consider how the overall desirability of the neighborhood is likely to affect its appeal to tenants. Are there attractive amenities like parks, shopping and entertainment venues? What do the local classified ads reveal — is the area’s vacancy rate high or low? How do rental prices compare with adjacent neighborhoods?
- Rental market projections for the area: Do some research on what the projections are for home rental values in the future in the area you want to buy in. Are they building many new rental homes/apartments which could affect the rental price of your home? Is the area growing? What are the projections of the job market in the area?
Besides choosing the right property, an in-depth financial analysis of all rental income and costs related to the rental property in question is a must in figuring out whether buying this rental property as an investment will be successful. Analyzing the local rental market to set a competitive rental price is the next step. Too high a price might leave the place unrented for a while and too low a price will cut into your profits.
While rental properties are certainly appealing, offering the promise of monthly cash flow in addition to long-term appreciation and tax advantages, investment properties have a number of costs that are both visible and hidden. The following COSTS should be considered before buying rental property:
Mortgage: Mortgage costs for investment properties are higher than for primary residences as they are considered riskier. Rates might be up to 1.5% higher and a higher percentage in down payment might be required as well. In addition, your credit score has to be excellent to qualify for a mortgage for an investment.
Property taxes: Property taxes can add significantly to the property cost. Make sure to find out exactly how high they are in the area that you are buying.
Homeowners insurance: Insurance rates are dependent on the region, especially if your home is located in an area prone to flooding, fires, earthquakes or other natural disasters. Make sure you find out how much the insurance policy would be prior to purchasing the property.
Maintenance: The amount of money to budget for maintenance and upkeep of the property depends partially on the age of the property and where it is located. In general at least 10 percent of the annual property rent should be set aside for this. To get the maximum price for your property when you sell it, you’re going to have to keep it in great condition.
Utilities and Association Fees: Utilities like gas, electric and cable are often the responsibility of the tenant. Other services like water might be included in the rent. If so, make sure to get an estimate from the utility company of the average monthly usage. Association fees are usually the tenant’s responsibility as well, but if you decide to include them in the rent, please plan for it accordingly.
Other expenses: Hiring a property manager who will be responsible for managing the maintenance of the rental property, will help searching for new suitable tenants and will take care of all the paperwork, can be expensive but will save you a lot of time. Expenses related to temporary vacancy of the property have to be taken into consideration as well, as do possible legal expenses and anything else that might come up.
If you’ve tallied up these expenses and you’re still in the black, this rental property might be a good investment. Budget carefully and stay on top of rent collections to ensure your property pays off. The rental property’s investment value grows as the loan is paid down month by month, year after year. Added to that is any appreciation in its market value. Needless to say, choosing the right rental property is worth the effort