Things to Consider Before You Buy Rental Property
April 7, 2021
“90% of all millionaires become so through owning real estate.” – Andrew Carnegie
Whether you are looking to boost your investment portfolio or planning to have an additional source of income before or during your retirement, buying a rental property is just the perfect idea. However, contrary to what you see in popular television shows about making a fortune by flipping a house, making money in real estate, especially by investing in a rental property, requires a lot more than just that.
You need to evaluate and assess a number of factors before investing in a rental property so that you can make the most out of it. What are those factors that can help you in making the right choice?
Well, here’s the list:
1) Choosing a Good Neighborhood
You cannot expect to attract tenants if your property is in a bad neighborhood. Therefore, a good neighborhood becomes the first factor that you need to take into consideration when choosing a rental property. Now, what does a good neighborhood means?
- It should be safe, have a low crime rate
- It should preferably be in the vicinity of the local school district (if you are looking to rent it out to a family)
- It should have connectivity to public transport and other necessary facilities
- It should have a well-presented exterior, sometimes referred to as curb appeal
These are some of the important things that make a neighborhood attractive to tenants. You need to keep these factors in mind when picking a rental property.
2) Analyzing the Condition of the Rental Property
The second important factor that you cannot afford to ignore is the condition of the property. You don’t want to buy a rental property that requires you to invest a big amount immediately after the purchase.
Therefore, it is recommended that you perform a thorough inspection of the property before you buy it. Even if you choose to go for a low price deal for a property located in a good neighborhood that requires immediate repair, make sure you get a complete estimate of the spending you will have to make getting the major jobs done. Compare it to the income that the rental property will generate once it is rented. This will help you get a clear picture of whether investing in such a house is worth your time and effort or not.
After all, nothing will be worse than having an empty rental property, on which you have already spend thousands of dollars in repairs.
3) Get to Know About Property Taxes
High property taxes could eat up the profits that you plan to make from the rental property. Therefore, it is always a good idea to get to know about the property taxes for the rental property that you are planning to buy.
Generally, property taxes are higher in metropolitan areas as compared to rural surroundings. However, you must get in touch with the local tax assessing authority to get a clearer picture.
It is also worth mentioning that these taxes for rental properties are higher in certain locations than they are for owner-occupants. So, you need to figure that out as well.
4) Operating and Capital Expenses
Besides property taxes, there are a number of maintenance and operational costs associated with a rental property. This includes its maintenance and running expenses.
It could be anything; from routine cleaning and maintenance to unplanned expenses like a broken appliance, damaged water heater, and so on. You need to keep into consideration the cost of these expenses when investing in a rental property, and plan your investment accordingly.
5) Vacancy Rates and Listings
If you want to make a good investment that brings great monetary returns, than another important factor to consider when buying a rental property is the number of listings for the neighborhood.
A high number of listings indicates that either the neighborhood is in decline. It might also be due to a seasonal decline. What’s the real reason, you have to figure it out. A high vacancy rate could also mean low rents since the owners will do anything to lure the tenants to their property. You need to consider and evaluate all these factors before you actually buy the rental property.
5) Future Developments In and Around the Area
Is there a big commercial project coming to the area in the near future? Will there be any big municipal development? Is there any new housing coming to the region, which might compete with the property that you are planning to buy?
For instance, development of commercial offices in an area, or arrival of a shopping mall should be looked as a positive sign of growth, which will drive the value of the property up in the future. In short, the rise of any future development that boosts the overall quality of life in the area could drive the property market up, since it will lead to increase in demand of housing in that area. Hence, you must look at it is a great sign to invest in rental property in that area.
You must get information about all this from the local municipal planning department. Remember, these things can have a big impact on the future rents and inhabitance of your property.
6) Returns from the Property
Most important of all, you need to set realistic expectations as to what you will get in return. You need to keep into consideration the operating expenses like maintenance, repair, and support work required to keep the property in the best shape, and compare it to the gross income you expect to make from the property.
The easiest way to calculate this is by subtracting the operating expenses from the gross income (calculated on the basis of average rent) of the property having units similar to the one that you are planning to invest in. The resulting figure that you will get will be the operating income from the rental property.
The best to come up with these numbers, like average operating expenses, is to get in touch with property managers in that area, or call the utility companies directly. In a similar way, to know about the average rents in an area to calculate the gross income you can have from a property, you can either check local newspapers, online listings, or contact local property management companies.
Once you have a number, you can easily figure out whether it is worthy of your time, effort, and money or not. Higher maintenance cost or operating income is one of the red flags that you should consider before investing in a rental property.
Owning a rental property involves risk as well as benefits. The risks include vacancies, getting a bad tenant, permanent damage to the property, depreciation in property value, and spending more on it than earning. At the same time, The list of benefits include a passive source of recurring income, chances of appreciation in the property value over a period of time, advantages associated with tax deductions and so on.
No one else can be a better judge of your personal circumstance than you. Therefore, make a learned decision by analyzing the pros, the cons, and the risks involved in buying rental property.
If you decide to go ahead with the decision to buy a rental property, you can always get the best help from a Negotiator Recognized Partner that can help you find the best rental property deals, negotiate on your behalf and do everything that it takes to make a worthy investment in rental property.
All the best!