Growing your rental portfolio can be an exciting time. It can also be confusing and intimidating. If you understand which details need your attention, purchasing rental properties can be a positive and rewarding experience.
If you’re buying a rental property these six tips are for you.
1. Assess The Neighborhood
In real estate, location is everything. Where you buy will determine what kinds of tenants you can expect. A family oriented neighborhood will likely attract families who are looking for a stable home while an area near a university is more likely to attract students. When buying a rental property make sure the home you buy meets the needs of someone who would want to live in that neighborhood.
Amenities such as schools, hospitals, access to public transit, and ample shopping can make a property more desirable to a larger group of potential renters. Buying a rental property is an investment and you want it to appreciate in value over time. Consider up-and-coming neighborhoods with good access to amenities and a good connection to larger urban centers.
The crime rate in the area you are looking to invest in is a detail you need to consider when buying rental property. Homes in places with a high crime rate are less desirable to potential tenants and are often harder to sell if you ever want to cash out. A high crime rate can negatively impact your insurance cost too.
A stable job market makes it much less likely that you will suddenly find yourself struggling to find tenants. Additionally you don’t want to end up with a tenant that can no longer afford the rent. Research the job market in the area before making an investment.
2. Understand The Property
If you’re buying a rental property, what the house itself offers will have a large impact on the types of tenants it attracts. Factors such as the number of bedrooms will appeal to different people. A finished basement, pool, or large backyard will cost you more but will attract a larger group of potential tenants.
The size and finishes of your property will affect the amount of rent you can reasonably charge. Aesthetically pleasing units catch the eye and attract more people. If there are multiple similar units available in the areas, the pretty one has an advantage and can sway prospective tenants to sign the lease without having to lower rent.
The price of the property is possibly the most important factor to consider. What you pay for the home will impact what rent you will have to charge and whether you can be competitive in the market. As a guideline frequently referenced by real estate investors, the monthly rent should be at least 1% of the total purchase price on the property.
3. Know The Property Taxes
One of the most important tips you can get when buying rental property is to mind your taxes. Property taxes can vary widely in a given area. They are affected by factors such as location, square footage of livable space, lot size, and luxuries such as pools
Do your research before putting in an offer and be aware of how much income you will be losing to taxes. Make sure you can afford the investment if you deduct the taxes you will be paying. Property tax is an unavoidable expense. Make sure you account for it.
4. Check Local Listings and Vacancies
It’s a good idea to check out local listings to see what you’re up against. Before you buy a rental property, find out how it compares to other units on the market. It’s not likely that a tenant will choose the unit that’s more run down without expecting a sizeable discount.
If the area has a lot of vacant apartments, your unit will have a lot of competition. It would be more difficult to be competitive and your only option may be to lower the rent just to find tenants. You don’t want to end up in a situation where your expenses outweigh your income.
Often high vacancies in an area can be a sign that the neighborhood is in decline. A property in a dying neighborhood is a poor investment. Property values are likely to decrease causing the resale value of your home to decline,
In some areas high vacancies are on a seasonal cycle. This may not be a bad thing if your busy season can carry the slow season. Often seasonal properties are less expensive and have lower property taxes. Under the right circumstances seasonal properties can be very lucrative investments.
5. Know The Average Rents
Ultimately the rental property you can afford to buy will be highly dependent on how much rent you can reasonably charge. Rental income is what will keep your business afloat. You need to know the area’s average rent rates before you commit to a property.
Any property you consider must generate enough rent to cover your mortgage payment, taxes, insurance, upkeep costs, and all other expenses. Ideally there should be extra funds to put aside for emergencies and a bit left over for income. The average rent in the area is a critical detail to look into before buying a rental property.
6. Consider Using Property Management Software
As you grow your rental portfolio you should consider the benefits of property management software. With every property purchase the insight good programing can provide becomes more important. The cost savings gained through the efficiency of property management software become more pronounced over time.
The right solution can help you streamline your business and save time and money. Repetitive tasks can be automated and errors reduced. Stay in touch with tenants and offer services through your property management software to keep tenants happy.
Keep these 6 tips in mind the next time you’re looking at buying rental property. Know all your costs and the income you are likely to collect. Understand the demographics of the area and match your property to potential tenants. Follow these simple steps and grow your rental portfolio with confidence.