Although it is possible to make money in real estate, there’s more to it than purchasing the first decent house you see. Remember, TV shows about flipping houses and investing in real estate depict a reality that’s far from what truly occurs in real life. If you’re interested in owning a rental property, make sure to consider these seven factors first.
1. Condition Of The House
There’s nothing wrong with buying a fixer-upper, but you need to be realistic about the time and money it’ll take to make an ugly duckling shine again.
After receiving a thorough inspection by a qualified professional, ask yourself how many of the repairs you can do on your own, and how many would require outside contractors. Get estimates for any major jobs that you would have to pay someone else to do.
You’ll want to make sure that you fix all serious issues before anyone moves in, as an unsafe house can lead to grave consequences if tenants become hurt or sick.
Calculate how long the repairs should take. If the house needs to be vacant for months while renovations take place, it may not be worth it. After all, there’s nothing more discouraging to landlords than an empty house that isn’t bringing in any income.
2. The 1% Rule
Every investor has their own goals when it comes to returns, but most will agree that the income from an investment property needs to abide by the 1% rule.
For example, if you buy a house for $100,000, it would need to bring in $1,000 a month. This amount is determined by a simple math equation: taking the estimated monthly rent and dividing it by the price of the house ($1,000/$100,000 = 1%).
You should only consider buying a house that doesn’t meet the 1% rule if the property is in a neighborhood that is rapidly changing and improving, with home values and rents estimated to jump significantly over a short amount of time.
3. Property Taxes
You should always consider property taxes when buying an investment property. High taxes will eat into your profits, while low taxes will allow you to keep a larger amount of your rental income each month.
As a general rule, expect to find higher property taxes in metropolitan areas, and lower taxes in more rural places.
Some locations charge investors at a higher rate than owner-occupants, so it’s worth calling your local tax assessor to determine whether this is the case.
Be sure to remember that even if you find the perfect house in the perfect neighborhood, high property taxes could make it a poor investment choice.
4. Insurance Costs
Just like property taxes, insurance costs can eat into your profits, so be sure to do your due diligence.
The first step is to decide what kind of coverage you want for the investment property. Do you want to pay a smaller premium each month but be faced with a higher deductible when you make a claim? Do you want to provide coverage for tenants’ personal property?
Secondly, you should determine 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. If this is the case, the house may not be worth it.
Once you’re ready to proceed, start comparing insurance rates. Many companies offer an online calculator, but calling a customer service number can often allow you to create a more customized policy based on your needs.
The location of a house is just as important as the house itself. You need to choose an area wisely, making sure it’s a place where tenants will want to live.
The most important factor to consider is safety, making sure the neighborhood’s crime rates are not too high. Curb appeal is also a major factor, as tenants will be more eager to live on a street with well-manicured lawns and nicely painted homes.
If you’re hoping to rent to families, you’ll also want to have a look at the local school district. Parents are more likely to choose areas that have well-ranked schools.
Buying a home near a university can be an excellent way to enter a strong rental market, although many investors are wary of renting to partying college students.
6. Property Management
Being a landlord can be a headache at times, so you should consider whether you’re willing to deal with 3 a.m. phone calls when there’s a plumbing disaster.
Many investors choose to hire a property management company to take care of everything for them. Most companies charge around 10% of the monthly rent, as well as a fee for procuring tenants. Some also charge to supervise maintenance repairs from outside vendors.
Some landlords believe the management fee is well worth it, while others choose to save money and deal with problems on their own. This decision is purely a personal one, but one you should carefully consider.
While the primary objective of purchasing an income property is to make money, you should prepare for unexpected expenses.
Calculate the amount of money it would take to replace major parts of the house, including the roof, HVAC system and water heater. Throw in a sizable amount of extra cash as a cushion. Always keep that amount of money available, whether on a credit card or in a savings account.
By: Abhi Golhar , Forbes Councils