The process of investing in rental property as a beginner can be exciting; however, before you get energized, it’s imperative to run some preliminary numbers to ensure you know precisely what you’re up against to ensure a winning investment.
First, you’ll want to carefully inspect potential rental income. If the home has already served as a rental property, you’ll need to take the time to find out how much the property has been rented for before, and then do your research to decide whether or not that amount is on the mark. In some cases, properties may have rented for less than they should, while in other cases a property may be over-rented. Look for equivalent properties in the neighborhood to make sure you know if the property in question is on the mark; Otherwise, you may find that the amount you think you’ll get in rental income is unlikely.
Mortgage interest is an additional area that needs to be carefully thought through. Be sure to identify and understand current interest rates as well as your exact loan details, as mortgage interest is the main cost you’ll face when purchasing an investment property. First, recognize that houses and duplexes tend to have loan structures similar to any mortgage loan. With a larger property; however, as a triplex; rates tend to be higher. If you are looking for commercial land with even more units; the issue of terms and fees is completely different. Typically, the more money you can put into the purchase of the property, the less interest you will have to pay.
Taxes are an additional issue. Many people use the taxes for the year in which the property was purchased and believe that they can use these numbers to guess daily expenses. This is not always the case as taxes do not stay the same; They characteristically change each year. Most of the time, taxes increase after you buy a property. This is particularly accurate if the property was previously owner-occupied. Therefore, it is usually a good idea to assume that taxes will increase on the property after you purchase it.
Apart from what many people fall short when it comes to taking into account is the cost of the house being empty. Since you would surely expect your property to remain rented out all the time, this is basically unreasonable. Chances are there will be times when your property is unoccupied. In general, you should expect that your property will include a 10% vacancy rate on average.
The cost of occupant turnover must also be taken into consideration. This often comes as a big surprise to many homeowners who assume that they will be leasing their properties and that the occupants will remain in the property for several years. Even more revealing is how expensive it is to fix up the property to let it out once again. Just some of the costs to bear are not just advertising for a new tenant, but also repainting, cleaning, etc. If the property was damaged, the full amount of restoration may not be fully covered by the collected security deposit.
Of course, the price of insurance must also be taken into full deliberation. Keep in mind that insurance for rental properties is often higher than for owner-occupied property. Be sure to get a quote instead of simply using the cost of your own home insurance as an estimating guide. Also, be sure to consider not only property insurance but liability insurance as well.
Utility costs are an additional area that is often underestimated. If the property has previously served as a rental property, be sure to find out exactly what the landlord pays and what the tenants pay. You should also be sure to find out if you will be responsible for any additional costs, such as garbage collection.
Lastly, consider property management costs if you won’t be managing the property yourself.