Searching
for investment rental property can be exciting and confusing at the same time,
depending on the part of the world you are living in. You need to carefully
examine potential rental income. If the property has already served as a rental
property, you need to take the time to find out how much the property has
rented for in the past and then do some research to determine whether that
amount is on target or not. In some cases, properties may have rented for lower
than they should have while in other cases a property may be over rented. Look
at comparables in the area to make sure you know whether the property in
question is on target; otherwise you may find that the amount you think you
will be receiving in rental income is unrealistic.
Taxes
are another issue. Many people use the taxes from the year in which the
property was purchased and assume they can use these figures to estimate
expenses. This is not always the cases because taxes do not remain the same;
they typically change every year. Usually, taxes go up after a property is
purchased. This is especially true if the property was previously owner
occupied. So, it is typically a good idea to just assume that the taxes will go
up on the property after you purchase it.
Mortgage
interest is another area that should be considered carefully. Make sure you
know and understand prevailing interest rates as well as the details of your
specific loan because mortgage interest is the biggest cost you will face when
purchasing investment property. First, understand that homes and duplexes tend
to have loan structures that are similar to any mortgage loan. With a larger
property; however, such as a triplex; rates tend to be higher. If you are
looking at commercial property with even more units; the matter of terms and
rates is completely different. Typically, the more money you are able to put
down on the purchase of the property, the less interest you will have to pay.
One
area which many people fail to take into consideration is the cost of the
property being vacant. While you would certainly hope that your property would
remain rented all the time, this simply is not realistic. There will probably
be times when your property will be vacant. Generally, you should assume that your
property will have an average 10% vacancy rate.
The
cost of tenant turnover should also be taken into consideration. This is often
a big surprise to many landlords who assume they will rent out their properties
and their tenants will remain in the property for some time. Even more of a
surprise is how much it costs to prepare the property to rent out again. Just a
few of the costs include not only advertising for a new renter but also
repainting, cleaning, etc. If damage was done to the property, the total cost
of repair may not be fully covered by the security deposit you charged.
Of
course, the cost of insurance should also be taken into consideration. Keep in
mind that the insurance for investment properties is usually higher than an
owner occupied property. Make sure you obtain a quote rather than just using
the insurance cost for your own home as an estimating guide. In addition, make
sure you take into consideration not only property insurance but also liability
insurance as well.
Utility
costs are another area that is frequently under-estimated. If the property has
already served as a rental property make sure you find out exactly what the
owner pays for and what the renters pay for. You should also make sure to find
out whether you will be responsible for other costs such as trash collection.
Finally,
take into consideration the costs of property management if you will not be
managing the property yourself.
