Investing in rental property is a lucrative business. Many people are earning passive income from rentals and using it to fund their mortgage. Nevertheless, like any other business, it is not that simple or risk-free. The investments made at the right time and place will pay off. There can be frequent fluctuations in income, and sometimes a rental cannot be turned into a profitable venture. If you have no prior experience managing a rental, you should start off by considering the following points:
1. The Location or Neighborhood
The location of the property is of utmost importance, as it determines the income potential. An emerging neighborhood or a busy area of the city is usually a good bet. For example, if you are thinking single family homes, you may look at suburban neighborhoods that are rapidly developing. You should mull over employment prospects, level of security, and availability of basic facilities. If you are leaning towards single or independent studio apartments, proximity to a university or commercial centers is feasible. Certain types of properties, such as a beach house, do not have a promising renting potential throughout the year.
2. The overall Condition of the Property
Investing in a fixer upper can be advantageous if the price tag is heavily discounted and the neighborhood is popular. However, it is necessary to call in a professional to evaluate the level of damage and estimate the total cost of repairs and renovation. For example, structural problems, like a leaky/collapsing roof, uneven floors, and faulty wiring/pipes can be quite expensive to fix. If it will take several years to cover the cost of repairs alone from the rent, this would become an unrewarding investment.
3. Ongoing Expenses
Rental property needs maintenance and there are additional costs for owning it. You have to pay real estate tax, insurance costs, and interest over financing. Routinely maintenance may include landscaping, updating the interior, fresh paint, repair/replacement of appliances, service of heating & cooling systems, pest control, and waste management. Do not forget that the burden of ongoing costs increases during the months/period when the property has no tenants.
4. The ROI
The purpose of investing in rental property is to acquire a positive ROI (return of investment). This is where you should stand by the 1% rule. For example, if you are buying real estate worth $100,000 then you should be able to generate a minimum monthly income of $1,000 from it, i.e. 1% of the total cost. With this equation, your annual proceeds from the rental would sum up to $12,000. On average, 50% of the annual income goes towards fulfilling ongoing expenses, so the estimated yearly profit would be $6,000. An exception to the 1% rule is if you are purchasing property in a neighborhood that is under development, and it’s evident that the rents will substantially increase in the near future.
5. Property Management
Not everyone is cut out to be a landlord because management of rental property can be quite challenging. You have to deal with complaints from tenants, conduct emergency visits every now and then, and always be prepared for unexpected expenditures. Apart from that, you need an air-tight lease, contingency plan, and the patience to tolerate problematic tenants. If you have set your eyes on a rental property, you must consult a local real estate attorney before going through with the transaction. This will protect you from real estate fraud and purchase of property that is subject to legal problems (which can be very costly to resolve).
Author Bio
John Adams is a paralegal who writes about widespread legal and social issues. He helps readers overcome challenges and solve many personal problems the smart way, rather than the hard way. He is also a technology enthusiast, eager to learn new things in the niche and share his understanding with the world.
