While searching for investment rental property, there are some essentials you should keep in mind. From the very start, you need to know exactly what you have in store for the future success of your investment.
You need to understand the potential rental income. For instance, has the property already been in use as a rental property? If so, you need to find out the amount that the property previously rented for as well as research whether the amount is current for the location or not. Keep in mind that some properties may have rented in a lower or over the amount that is current for the location. Ask around to find out whether the property is on target with comparable properties. By doing so, you can determine if you will get the amount, you think you should or if your expectations are improbable.
Another thing you need to consider with care is the mortgage interest. Because the mortgage interest is the biggest cost you’ll probably encounter when buying an investment property, it’s important that you understand the details of your specific loan along with the interest rates. Most homes and duplexes have mortgage loan structures that are very alike. Triplex and bigger properties are generally somewhat higher, while rates and terms are completely different when a commercial property with more units is being considered. Generally speaking, the bigger your down payment on the property, the less interest you have to pay.
You’ll have to keep the taxes in mind as well, especially since most people only consider the taxes from the previous year when trying to figure out how to estimate their expenses. This sort of assumption could lead you to some inaccurate figuring, because taxes usually change from year to year. After a purchase, taxes on a property typically increase in amount, particularly when the property was previously occupied by its owner. It’s common sense to assume the property taxes will increase after the purchase.
Although, you may hope that your property is rented all the time, this is not reality; you need to consider the costs of vacant property as well. There are times when your property will be vacant by nearly a ten percent vacancy rate.
You will also need to consider tenant turnover, and never simply assume that your tenants will stay in the property for any length of time. You also need to consider the cost of preparation for renting the property again. These costs may include, advertising for new tenants, cleaning, repainting and so on. There is also the possibility of the security deposit not being enough to cover all the damage after a tenant vacates the property.
Insurance costs are something else to remember, especially since the property insurance for an investment property is likely to be higher than a property that an owner was occupying. Not only that, there’s also liability insurance to consider as well. Make sure you research quotes instead of estimating the cost yourself.
A common error many property errors make is to underestimate the true cost of their utilities. If you’ve purchased property that was previously rented, you should find out what you pay for as opposed to what your tenants pay for. Who pays for waste disposal, for example. It’s important to figure out what exactly your responsibilities are.
Finally, it’s a good idea to consider how much property manage will cost you if you’re not going to be managing the property yourself.
Joaquin Schneggle has worked closely with investment property owners for more than twenty years as lawyer, counselor, and property owner. He provides copy and paste free rental forms for every state on his Landlord Law website.