8 Things to Consider Before You Buy Investment Rental Property
There are a few essential considerations to keep in mind when searching for investment rental properties. From the very start, you ought to know precisely what you have at stake to ensure the future success of your investment.
Understanding the potential rental income is the first requirement. For example, has the property in question been used as a rental property before? If this is the case, you’ll have to discover how much the property was previously rented for, along with finding out whether that amount is appropriate for its location. Consider that some properties might have been rented for higher or lower than their locations might warrant, so check around to see if your property is on target with comparable properties to determine whether or not the amount you’re looking for is realistic.
Be sure to carefully consider the mortgage interest, since it will probably end up being the largest cost you have to deal with when purchasing a rental property. Because of this, it’s important that you fully understand the specific details of your loan and its interest rates. While most houses and duplexes have a similar mortgage loan structure, larger properties such as triplexes will probably be somewhat higher. Also, terms and rates are significantly different for commercial properties, which have more units. As a general rule, the more you invest in the down payment, the less interest you’ll end up paying on the property.
You’ll have to keep the taxes in mind as well, especially since most people only consider the taxes from the previous year when trying to figure out how to estimate their expenses. This sort of assumption could lead you to some inaccurate figuring, because taxes usually change from year to year. After a purchase, taxes on a property typically increase in amount, particularly when the property was previously occupied by its owner. It’s common sense to assume the property taxes will increase after the purchase.
While of course you’ll want to imagine that your property is constantly rented, in actuality this probably won’t be the case. You’ll have to reckon with the costs of a vacant property, since most rental properties have a ten percent vacancy rate on average.
Tenant turnover must definitely be kept in mind, since you can’t assume that your tenants will always choose to stay in the property for an extended period of time. Consider the costs of getting the property ready for rental again, which will include cleaning, repainting, advertising for new tenants, and more. There’s also a chance that the security deposit might not be sufficient to pay for all the damages after your tenant has vacated the property.
You also need to consider the cost of insurance, while keeping in mind that investment property insurance is generally higher than your owner occupied property. You should consider liability insurance as well as property insurance. Search for a quote rather than estimating the cost based on your insurance costs.
Many rental property owners will under estimate the cost of utilities. If you purchase previously rented property, you need to know exactly what you pay for and what your tenants pay for, to find out what you and they are responsible for while renting to a tenant. For instance, is waste disposal your responsibility and so on?
And, as a final consideration, you’ll have to calculate the expenses of managing the property. This, too, is an overlooked cost, but an essential one to remember if you don’t intend to manage the investment property yourself.
Joaquin Schneggle has worked closely with investment property owners for more than twenty years as lawyer, adviser, and property owner. He provides excellent free rental forms for every state on his Law for Landlords website.
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