Buying the first decent house you see may seem like an easy way to make money in real estate, but there is more to it than that. It’s important to remember that TV shows about flipping houses and investing in real estate portray a reality that’s far from what happens in real life. If you want to own a rental property, make sure to consider these seven factors first.
The house’s condition
If you’re thinking about buying an ugly duckling, you should be realistic about the time and money it will take to turn it around.
Upon receiving a thorough inspection from a qualified professional, ask yourself how many of the repairs you can handle on your own, and how many will require the services of an outside contractor. Make sure you get estimates for any major jobs that you will have to pay someone else to do.
As a landlord, you’ll want to ensure the house is safe before anyone moves in, as an unsafe house can have grave consequences if tenants get hurt or sick.
Estimate how long the repairs will take. It may not be worth it if the house needs to be vacant for months during renovations. In the end, there’s nothing more discouraging for landlords than an empty house that doesn’t generate income.
Applying the 1% rule
Investors have different goals when it comes to returns, but most will agree that an income from an investment property should adhere to the 1% rule.
A $100,000 house, for example, would need to bring in $1,000 a month. The amount is determined by taking the estimated monthly rent and dividing it by the price of the house ($1,000/$100,000 = 1%).
A house that does not meet the 1% rule is worth considering only if it is in a neighborhood that is rapidly changing and improving, with home values and rents projected to increase significantly over the next few years.
Taxes on property
Property taxes should always be considered when buying an investment property. Low taxes will allow you to keep a larger portion of your rental income each month, whereas high taxes will reduce your profits.
Property taxes tend to be higher in metropolitan areas, and lower in more rural areas.
Investors may be taxed higher in some areas than owner-occupants, so it’s worth contacting your local tax assessor to determine whether this is the case.
You should remember that even if you find the perfect house in the perfect neighborhood, it could be a poor investment choice due to high property taxes.
The cost of insurance
Insurance costs can eat into your profits just like property taxes, so make sure you do your homework.
Your first step should be to decide what kind of coverage you need for your investment property. Would you prefer to pay a smaller premium but be faced with a higher deductible when you file a claim? Would you like to provide tenants with personal property coverage?
In addition, find out whether the area you’re interested in has higher insurance premiums due to its vulnerability to floods, sinkholes, tornadoes, hurricanes, earthquakes or other natural disasters. The house may not be worth the money if this is the case.
Start comparing insurance rates once you’re ready. While some companies offer an online calculator, you can often create a more customized policy by calling a customer service number.
Neighborhood
It is just as important to think about the location of a house as the house itself. It’s important to choose an area wisely, ensuring tenants will want to live there.
Making sure the neighborhood’s crime rate isn’t too high is the most important factor to consider. Curb appeal is also an important consideration, as tenants will be more inclined to live on a street with well-kept lawns and beautifully painted homes.
It’s also a good idea to take a look at the local school district if you’re hoping to rent to families. Schools with high rankings are more likely to attract families.
Although many investors are wary of renting to partying college students, purchasing a home near a university can offer an excellent way into a strong rental market.
Management of properties
The role of a landlord can be challenging at times, so you need to decide whether you’re willing to deal with 3 a.m. phone calls when a plumbing disaster occurs.
Investors often hire a property management company to handle everything for them. Rent and a fee for locating tenants are typically charged by 10 percent of the monthly rent. Some properties charge to supervise maintenance repairs by outside contractors.
Several landlords believe the management fee is well worth it, while others prefer to save money and deal with problems on their own. This is purely a personal decision, but one you should carefully consider.
Unexpected Costs
While the primary objective of purchasing an income property is to make money, you should be prepared for unexpected expenses.
Estimate how much it would cost to replace major parts of the house, such as the roof, HVAC system, and water heater. Add a significant amount of extra cash as a cushion. Whether it be a credit card or a savings account, make sure you always have that amount of money available.