While searching for investment rental property, there are some essentials you should keep in mind. From the very start, you need to know exactly what you have in store for 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.
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.
Yet another thing to consider is how much insurance might cost, while remembering that insurance for an investment property is usually more than a property occupied by an owner. Also, you’ll have to think about liability insurance in addition to property insurance. Look around for a solid quote, don’t just estimate the expense based on your insurance costs.
Most rental property owners will unfortunately underestimate utility costs. If your property has been previously rented, you’ll have to know precisely what your tenants pay for and what you pay for, so that you know for certain which are your responsibilities and which belong to your tenants.
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 thirty years as lawyer, investor, and property owner. He provides practical free rental forms for every state on his Landlord Law website.