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.
You need to understand the potential rental income. For instance, has the property already been in use as a rental property? If so, you need to find out the amount that the property previously rented for as well as research whether the amount is current for the location or not. Keep in mind that some properties may have rented in a lower or over the amount that is current for the location. Ask around to find out whether the property is on target with comparable properties. By doing so, you can determine if you will get the amount, you think you should or if your expectations are improbable.
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.
Taxes will also need to be taken into account. Most people simply look at the property taxes from the year before the investment property was purchased, and assume that figure will be similar when they estimate their costs. However, since taxes usually change from one year to another, this isn’t always true. Taxes often increase after a purchase, particularly if the owner previously occupied the property, so it’s clearly a good idea to presume that the property taxes will increase after you’ve purchased the rental property.
Although, you may hope that your property is rented all the time, this is not reality; you need to consider the costs of vacant property as well. There are times when your property will be vacant by nearly a ten percent vacancy rate.
Tenant turnover is something else to keep in consideration, since as much as you’ll want to assume that tenants are staying in the property for awhile, you can’t take it for granted. And when tenants leave, a bunch of costs suddenly appear, as you’ll need to prepare for renting the property again. These expenses can include things like repainting, cleaning, and advertising for new tenants. And it’s usually wise to expect that the security deposit won’t cover any damages left behind by the tenants.
Insurance costs are something else to remember, especially since the property insurance for an investment property is likely to be higher than a property that an owner was occupying. Not only that, there’s also liability insurance to consider as well. Make sure you research quotes instead of estimating the cost yourself.
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 three decades years as lawyer, counselor, and property owner. He provides practical free rental forms for every state on his Landlord Law website.