Things to Consider While Buying a Rental Property
Rental investment is a huge investment and it is important to be well versed before investing.
There are certain things and factors to be considered while buying a rental property.
Rental Yield of the property
Rental yield is the income generated from your investment property by calculating the difference between the sum of overall costs on a property and the rent received from the property. Understanding and calculating rental yield helps gain a good perspective on knowing the investment potential of the rental property. It also helps the investor to choose the best rental yielding property by comparing the property values with respective rental yield ratios and make a wise decision. It can also be called as rental income calculator or cash flow calculator. Understanding rental yield concepts are important to create a successful investment strategy.
Location of the property
Another important aspect to consider while choosing the rental property is the Location. As some aspects of the home such as the interiors of the home, floor plan of the home and even the number of bedrooms and bathrooms may be modified. But the location is something which cannot be changed or modified. It is very important to choose a Location that fits most of your expectations of an ideal rental property. The rental income is also usually higher in a property located in a good location. Though there are generally a lot of benefits investing in rental properties by choosing the property with a good rental ratio, choosing it in a Landlord friendly state increases the benefits and reduces the risk of being an investor.
Age and condition of the property
The age and the condition of the property plays a major role in decision making. There are a number of maintenance costs associated with the maintenance of the older property such as HVAC systems, plumbing, roof repair and maintenance, electrical issues. It is advisable to know the lifetime of the HVAC systems, plumbing and electrical components and plan the finances accordingly. The age of the roof may be lesser than the average in areas prone to hail. It is advisable to put aside a sum amount of money for each property for emergency purposes.
It is important to analyze the crime rate of the neighborhood as safety is a very important aspect. Areas with high crime rate not only reduces the rental income but also increases the vacancy rate of the property. Curb appeal also plays a major role to attract more tenants willing to live in the property. If there are lot of constructions going on, it may be a sign of growth but it is also important to be aware that lot of construction in an area could also mean a lot of competition while renting the property out.
Properties located in areas with good schools usually have a high purchase price, but it can be compensated by charging a higher rent. This not only increases the sale price of the property while deciding to sell, it also creates a demand for the property thus reducing the vacancy rate of the property. The rental home having a less vacancy rate is much more important than being able to charge higher rent in the long run.
Number of Bedrooms and Bathrooms
The choice of number of bedrooms and bathrooms needed depend on the individual's choice. Tenants with children usually prefer to have at least 2 bedrooms or more as some prefer to have separate bedrooms for their kids as they may have different bed times and the extra room can always be used as an office or storage space. Most of the tenants prefer to have at least 2 bathrooms as it facilitates and saves a lot of time in their daily morning routines and the size of the bathroom matters too.
Some investors plan to hire a property management company to take care of their property. Though the management is a little pricier, it takes care of all the problems and issues that arise on the property. They also help in listing the property, screening the tenants and also provide eviction protection for an additional fee. Some landlords consider this as a beneficial investment as they take care of all the problems that arise on the property, some think they will be able to save money if they deal with the problems on their own. It all depends on the personal choice of an individual.
Access to the public transportation is usually high in the tenant expectation list as it creates a great impact in commuting to the workplace and the quality of lifestyle. It is advisable to consider how easily the residents may be able to get to highways, shopping centers and other basic necessities while deciding on the property as it increases the potential of the investment property.
Property tax varies from location to location. Usually the property taxes are higher in cities with better schools and amenities. It is important to analyze whether the property taxes paid in a particular area are worthy of the amenities received. Though the investment properties have depreciation benefit, it is advisable to take note of the property tax in the area as it greatly influences the monthly rental cash flow.
It is important to be aware of the natural disasters that the area is prone to when you decide to buy an investment property. Especially in areas prone to flooding or earthquake, the insurance cost is very high and it may reduce the monthly cash flow. Though there is an insurance coverage, the damages caused may result in loss of rental income for months and the coverage usually gets activated only after paying a deductible out of pocket which might be a large amount depending on the policy.
Vacancy rates in the area
It is important to be aware of the vacancy rates in the area as the high vacancy rates may lower the value of the property that you are planning to invest in. The high vacancy rate may also be due to seasonal cycle rather than the property's location. If the vacancy rates are lower, there is an increased chance of raising the rent in future. If the vacancy rates are higher, the rent may decline in the future.