With reduced real estate prices, this is undoubtedly a great time to invest in this market.
Because of this, you might consider buying a rental property that can offer you and your family infinite wealth in the future.
However, you shouldn’t rush and spend your hard-earned money to acquire rental property without first doing your due diligence.
This is a mistake that many aspiring real estate investors make and, as a result, buy a bad property that doesn’t generate enough money as expected.
Luckily, you can avoid finding yourself in such a fix by following these specific tips to help you pick out the best rental property and start making a profit.
Contents
1. Factor in the 1% Rule
It’s best to project how much you’ll earn from your real estate investment; this is where the 1% rule comes in.
This rule states that a rental property you choose to invest in should ideally yield about 1% of its purchase price in rent and any extra expenses after purchase.
For example, if the rental property had a list price of USD$100,000 and you did renovations that added USD$10,000, the monthly rent should be USD$1,100.
Therefore, your gross monthly rent should ideally be 1% of the total investment, which is USD$1,100.
Examining the pro forma report will help you look for a rental property that satisfies the 1% rule to know whether this investment will earn you a sufficient income in the long run.
With that said, the 1% rule might not always be applicable, especially regarding rental property in a high-end neighborhood.
In this scenario, you may choose to lower the expected monthly return and see this purchase as a long-term investment.
2. Consider the Rental Property’s Location
Location is the most significant factor to consider when evaluating a rental property. Remember, you can’t change the property’s location, so you must be sure about the neighborhood.
When first deciding on the right property location, some questions to ask yourself to gauge its suitability include:
- Is the location safe?
- Are there plenty of amenities nearby?
- What are the demographics of the area?
- Is it rural, suburban, or urban?
- Is the neighborhood in decline, stable, or expanding?
- Are there future opportunities for growth?
These are just a few things you should consider when determining whether a rental property is right for you. It’s been shown that a good location is one of the critical elements for a successful rental property.
This is because it boosts the potential to attract more prospective tenants who can afford to rent the property and have access to amenities such as schools, shopping malls, parks, and transport facilities.
If you want to invest in high-demand properties, consider the ones near popular cities or towns. These areas have more people living there, so they’ll appeal to more tenants and make your investment more profitable.
3. Run the Numbers
When considering buying a rental property, it’s essential to run the numbers to assess whether it’s a good investment.
Doing this is especially crucial because purchasing a rental property isn’t cheap. Therefore, you want to be certain that it’s a worthwhile asset.
When running the numbers, you should start by first understanding your budget, and here are some questions you need to ask yourself:
- What sum of money can you set aside for the real estate investment?
- Where can you get an extra budget if your budget is enough?
- What sum of money do you need to borrow? Also, what are the expected interest rate and mortgage payments?
- How much money are you ready to lose?
Besides your budget, you also need to run the numbers to find out how much the rental property is worth, and some important things to answer are:
- What’s the estimated rent you’ll earn from the real estate investment?
- What are the property’s actual income and expense sheets?
- What’s the Net Operating Income for the rental property?
- What’s the insurance cost?
- How much tax will you pay?
- How much will the annual property maintenance cost be?
After determining the rental property’s value, you can decide if the real estate investment is a viable purchase.
And as with any expensive purchase, doing this is vital as you don’t want to rush buying a rental property without knowing what to expect.
4. Understanding the Risks
Like any other investment, buying a rental property comes with risks.
Therefore, you must take time to learn of the potential risks to avoid being caught off-guard and see whether this is a risk you’re willing to take. Some of the possibilities you need to know about include:
- Increase in property taxes
- Your rental interest might not be as expected
- There might be a change in the local market economy
- You might have bad tenants, thus often deal with issues such as eviction or repair costs
- You might need to do extensive repairs, which won’t be cheap
Even though you shouldn’t dwell too much on these possible risks, you shouldn’t ignore them because investing in a rental property isn’t guaranteed.
With these risks in mind, you won’t be caught unprepared when an issue arises. Because of this, your finances will be a lot more flexible.
5. The Property’s Age
Another vital thing to consider when buying a real estate property is its age. This is an essential consideration because the older a real estate property is, the more money you’ll need to spend on repairs.
However, this doesn’t necessarily mean that older rental properties aren’t excellent investments should you want to try your hand in real estate investing.
Older rental properties also don’t have certain amenities and features that might make them appealing to prospective tenants.
Because of this, you might need to renovate your home or lower the monthly rent to entice potential tenants into paying.
Takeaway
Investing in real estate is an excellent way to diversify your investment and enjoy consistent cash flow in the future. But this doesn’t mean that rental property investment is foolproof.
This is why this guide has outlined tips you need to have in mind when evaluating a rental property to see if it’s a worthwhile investment.
Having these insights will help you make the right decision as to which rental property to buy.
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