7 Things to Consider When Buying a Rental Property
Do you want to rent out property? While you can use rental homes to generate cash flow, there are things to consider when buying a rental property. Here are 7 important facts.
Are you looking for a little more cash flow?
Do you think that buying a rental property is the answer?
It very well could be, especially if you have a little extra money on your hands and are looking for a way to invest it.
But it’s not just a matter of buying a property, renting it out, and then sitting back and watching the cash flow in.
There’s a lot that needs to be considered before making this real estate investment.
Buying a Rental Property Is a Big Decision
And if done carelessly, it could cost you. A lot.
If done thoughtfully though, it could make you some decent money over time.
So once you find what you think is the ideal rental property, ask yourself the following seven questions:
1. What’s the Condition of the House?
Sure, the asking price on a fixer-upper is going to be much lower.
But the time and money that goes into actually fixing it may not be worth the payoff. So you’ll need to be realistic about just how you’re going to save in the long run.
If you’re pretty handy, then you may be able to tackle a lot of the repairs on your own. And that will definitely save you some money.
But some might require professional contractors. So get those estimates as soon as possible.
Then figure out how long the repairs will take (and plan for them to take longer). A house that has to sit vacant for months while renovations take place may not be worth it.
It’s vital that you fix all serious issues before anyone moves in. Moving people into an unsafe house is a huge liability and could be dangerous.
2. What’s the Neighborhood Like?
A neighborhood with a desirable school district, low crime rate and plenty of amenities is going to make finding tenants far easier.
Plus, a quality location will demand better rental rates, fewer vacancies and responsible tenants who are more likely pay rent on time.
Be sure to do your research though. Some other things to consider are:
- If the area is predominantly rental or owner-occupied
- What other rental properties in the area are charging
- Whether property values have increased, stayed the same, or decreased in the past 2-5 years
There’s no magic formula.
For instance, buying a home near a university is a nearly surefire way to pull in decent rent with minimal vacancies. But the notion of renting to partying college students isn’t appealing to everyone.
3. Will You Be Managing the Property?
Do you have what it takes to be a landlord?
Even if you’ve done all the footwork to update and repair your property, there’s nothing like that 2 a.m. plumbing disaster. And you’ll need to take care of it.
You may choose to hire a property management company instead. They’ll take care of all of those headaches. But you’ll need to plan to pay them around 10% of the monthly rent. You’ll also have to pay them a fee for procuring tenants.
This convenience might be well worth it for you. But be sure to include it in your budget.
4. How Much Will Insurance Cost?
Figuring out what sort of coverage you’ll want for your rental property is tricky.
Right off the bat, should know whether the area is prone to floods, tornadoes, sinkholes, mudslides, hurricanes, earthquakes or other natural disasters. The insurance premiums will be far higher in those cases and the house may not be worth it.
If that’s not the case, then you have to ask if you’re better off with a smaller premium and higher deductible? And what about coverage for your tenants’ personal property should something go wrong?
Again, there’s no right answer. And it’s a lot to consider. So be sure to compare insurance rates from different companies.
Your best bet is to actually speak to a representative who can help you create a more customized policy.
5. What Are the Property Taxes?
Just like insurance costs, high property taxes can derail your good investment.
Generally speaking, you can expect higher property taxes in metropolitan areas than in more rural places.
Again, do some research. Get in touch with the local tax assessor to determine if you’ll be charged a higher rate as an investor than you would as an owner-occupant. Some locales do this.
And you should also be aware that if a homestead exemption was in place for the previous owners, there could be a big increase in property taxes.
6. Are You Ready for the Unexpected?
The reality is, rental houses typically require more maintenance than the usual owner-occupied home.
And there will occasionally be larger, unexpected expenses.
For example, the house will eventually need a new roof. Or if the HVAC system is old, it’s only a matter of time before it will need replacing.
Also, check the condition of the siding and exterior of the house, and ensure that there’s no water damage anywhere in the house.
There will always be issues that need your attention and those repairs will eat into your return on investment.
Another thing to consider?
As tenants come and go, it could take some time to rent out a just-vacated unit. Particularly if it needs some repairs or updating.
But in the meantime, you’ll still have to pay the mortgage, property taxes and insurance. So budget for this.
7. Is It Truly a Sound Investment?
That’s really the question.
Some advise that you follow the 1% rule which says that if one month’s rent is equal to or greater than 1% of the home’s value, then it’s a good deal. So you’d want to get $1,000 per month on a $100,000 house.
Others say it’s a sound investment if the rental income is sufficient to pay for all expenses, as well as pay off the mortgage in 10 to 15 years.
Whatever the case, the ideal situation would be to receive some sort of additional monthly cash flow, even after you’ve paid all your expenses and your mortgage payment.
That’s the ultimate goal.
Are You Ready to Invest?
Real estate investment is a viable way to increase your cash flow. As long as you’re careful and patient.
Just remember, buying a rental property is not a get-rich-quick scheme. So plan for the long-term by focusing on quality properties at reasonable valuations.
And if you’re thinking about taking this big step, be sure to contact us. Our decades of experience in both real estate and property management will help you be confident in your next step!