Investing in a rental property is a big decision. Although it can be profitable, it can also come with its share of unprofitable surprises along the way. If you’re considering purchasing rental real estate, here are three things you should keep in mind.
Understand The 1% Rule
Sure, everybody has their own idea of what a positive ROI looks like in the real estate investment world, but any smart investor will tell you it’s important to find properties that yield positive results straight out of the gate. Your investment definitions will give you a chance to identify properties in the 1%.
The One Percent rule is particularly applicable to investors of rental properties. Essentially, it dictates the fact that you expect to achieve 1% of the total mortgage in monthly rent. In other words, if you buy a house for $100,000, you’ll want at least $1,000 a month in rent. If you can get more, great! But you never want to purchase a home that can’t stand up to the 1% rule.
Take Outside Expenses Into Account
So, you’ve budgeted for your mortgage. That’s awesome, and you’re off to the right start, but have you thought about homeowners’ insurance, taxes, and other items that can quickly chip away at your wallet?
You need to look at the taxes in your area before you sign on to buying a rental property. If you can’t rent your place at a high enough monthly charge to cover your standard expenses, you’ll be paying your renters to be tenants. That’s not the way it’s supposed to work! Before you purchase a property, it’s important to understand all the underlying costs, including:
- Property taxes
- Insurance costs
- Regular maintenance of HVAC, water heater, and roofing systems
While the upfront annoyance can be cumbersome, you’ll save yourself a ton of money on the back end if you do things right on the first try. You will also have to pay closing costs when buying a new property. Calculate the total upfront and recurring costs of owning a rental property.
Get Real With Your Neighborhood
The neighborhood means everything. This is how you’ll attract families who are gravitating toward the ‘burbs’ or cash in on a young couple who wants to experience the city and everything it has to offer.
As an investor, it’s on you to understand the people you’re trying to attract. You need to think about this before you decide on an investment rental property. Are you trying to get families to take a look at your space? Go for neighborhoods that offer garages and are close to great school districts. Are you more interested in trendy couples who can turn your space into a beautiful place? Up-and-coming urban areas are probably the way to go.
Here are a few things you should consider as you’re shopping around for an investment rental property:
Aesthetics matter, especially if you’re trying to appeal to the attention of renters. They want a beautiful home they can invite their friends to visit. If your spot is lacking in curb appeal, great renters might pass you up.
They don’t have to be beautiful when you buy them, but you should definitely put money aside to ensure the kitchen and bathrooms are updated with outstanding fixtures. You may have to consult with remodeling services to get quotes for the entire project. These two rooms are the money spot when you’re trying to rent a place out.
Crime & Safety Updates
You don’t have to reveal the bad stuff unless you’re asked, but it’s helpful to have positive information on hand so you can boast about the good elements your community brings when potential renters want to know about the neighborhood.
It’s all about knowing your neighborhood so you can market to the people who will most likely be ideal renters. Sure, things could change over time, but when you arm yourself with the knowledge of your neighborhood, you’re bound to attract people who will help you achieve a positive ROI.
If you truly want to protect your real estate investment, hire a team of property management professionals who know how to navigate the industry. By hiring a professional, you can ensure that all your bases are covered before you invest in a rental property and with the right company, you’ll be able to see the value of their investments for decades. So, stop wandering through the rental world alone, and partner with a group of people who has your best interests at heart.