If you’re looking for low-risk investments, it’s likely that real estate is already on your list of possibilities. After all, real estate is less susceptible to inflation than stocks, and it has the potential to generate significant profits over time. In addition, if you don’t want to wait for the price to rise, you can always invest in a rental property and earn money as a landlord.
However, buying a rental property is not as straightforward as it appears. In order to get the most out of your investment, you must consider several factors, including the location and condition of the house, operating investments, and legal obligations.
In the article below, you will learn more about them and some other important points that you should be aware of. Continue reading to gain a better understanding of the subject and determine whether investing in rental property is right for you.
Location and Condition
The condition of your rental property is crucial. You’ll likely have to spend some money on repairs at some point. You shouldn’t worry too much about it, though, as most experienced landlords spend between 3% and 5% of their annual gross income on maintenance, which isn’t a high amount. However, you must have enough cash in case something goes wrong.
To avoid emergencies, check the condition of the place. Look especially at:
- The roof — it should be in good condition, without holes or leaks. Otherwise, you run the risk of damaging the home’s interiors.
- The walls — they should be free of cracks, peeling paint, and mildew.
- The foundation — it should be stable and secure.
- The plumbing — all fixtures should be operational.
- The heating and cooling system — it should be working properly. Double-check if the AC unit is well maintained and in good shape.
- The electrical wiring — it should be in good condition.
- The flooring — it should be free of holes, cracks, or peeling paint.
- The garage — make sure that it is spacious enough to park your car and store some belongings. You can visit a site like https://www.garagedoornation.com if you need any tips on how to improve your garage.
- The windows — check if they are in good condition and have no leaks.
- The doors — they should be solid enough to keep burglars out.
- The deck or patio — it should be in good condition and allow tenants to spend time outdoors in the summer.
The location of the property is another vital factor to take into consideration when investing in rental property. If you want to make sure that your investment will be profitable, you need to find out about the best locations in town and check if any of the places you can afford are situated there.
When learning more about location in real property, take into consideration the following factors:
- Transportation — Think about proximity to an important road or highway, public transportation availability, and public transportation stops.
- Utilities — Consider the availability of electricity and water.
- Schools — It includes the location of the nearest school and its reputation.
- Public spaces — Search for parks, shopping malls, recreation centers, restaurants, and other entertainment.
- Crime rate — Establish the general level of criminal activity in a neighborhood.
- Special features — It features things like access to a lake or ocean beach, nearness to a forest or river, or the presence of historic buildings. These features can help you attract more tenants and increase revenue.
- Property taxes — The lower, the better.
- Job market — The easier it is for people to get to their workplace, the more eager they will be to rent an apartment/house from you.
To ensure that your rental property will be a profitable investment, you should also consider the operating costs. These costs are usually calculated as a percentage of gross annual income. For example, if your rental property generates $10,000 in annual income and your operating expenses are $5,000, then your operating cost is 50%.
You can use the following expenses as a guide when you’re looking for a rental property:
- Taxes — property taxes and tax assessments.
- Insurance — fire insurance, liability insurance, and auto insurance.
- Utilities — heating, cooling, and water bills.
- Maintenance — repairs, painting, and cleaning.
- Lawn care — mowing and watering the lawn.
- Management fees — hiring a property manager or an accounting service.
- Repairs — replacing broken windows and appliances.
- Legal fees — buying the property.
- Reserve fund — you should have enough money set aside to cover unexpected repairs.
The total amount of these expenses should not exceed 30% of your gross annual income. This way, you will have an easier time managing your finances and keeping your property in good shape for many years to come.
Another thing that you should take into consideration when deciding whether or not to invest in rental property is your legal obligations. For example, if you choose to buy an apartment building, you’ll have to deal with local management laws and regulations. In addition, if you rent out a house, you’ll need to follow specific rules and guidelines.
To learn more about local management laws and regulations, visit the website of your state’s department of commerce. You can also gather information about these laws from your state’s department of housing and community affairs.
It is also crucial that you know the difference between renting and leasing. Renting is a short-term agreement that runs for months or years but is not long-term. Leasing, on the other hand, is a long-term agreement that may last for decades but is not permanent.
The most common short-term rental agreements are:
- Weekly — the tenant pays weekly rent and stays in the property for at least seven days.
- Monthly — the tenant pays monthly rent and stays in the property for at least 30 days.
- Quarterly — the tenant pays quarterly rent and stays in the property for at least 90 days.
- Six months — the tenant pays six months’ rent and stays in the property for at least 180 days.
- Annual — the tenant pays annual rent and stays in the property for at least 12 months.
The most common long-term lease agreements are:
- Fixed-term — the tenant pays one month’s rent as a deposit and agrees to stay in the property for at least one year.
- Fixed-term with an option to purchase — the tenant pays one month’s rent as a deposit and agrees to stay in the property for at least one year. The tenant has an option to purchase the property after the contract expires.
- Fixed-term with an option to renew — the tenant pays one month’s rent as a deposit and agrees to stay in the property for at least one year. The tenant has an option to renew or extend this agreement for another year after the contract expires.
- Tenancy at will — there is no lease agreement, but both parties agree that the tenant can live in the property until they choose to move out or until either party decides to terminate the contract.
After reading this article, you should have a better understanding of how to buy rental property and the factors you should consider before choosing this option.
If you’re thinking about buying a rental property, make sure that you’re aware of the risks that you’ll be taking on. Don’t forget to consider the location, condition, operating costs, and legal obligations before making a final decision.
If you carefully weigh all of the pros and cons, investing in rental property can be a very profitable move — but only if you know what you’re doing. Do your research, make a sound investment decision, and reap the benefits it provides. Good luck!