Investing in property for lease requires an examination of several aspects. Here’s what you should know before investing in rental property.
What you will discover:
1. Not all properties are winners.
2. When purchasing rental property, location is always important.
3. The standard rent is 1% of the home’s worth.
4. The tax benefits may vary.
5. Property rental is a dangerous enterprise.
6. You are in charge of upkeep.
7. Review agreements with any present renters on the property.
8. It is critical to record everything.
Many individuals succeed in investing in rental property, but this does not imply that it is easy money. As with any company, there are strategies to improve your chances of success while lowering your risks. Here’s what you should know before investing in rental property.
Table of Contents
1. Not all properties are winners.
Not all properties are the same. A decent rental home is not always one that you will like living in. You must grasp what potential renters are looking for.
A little property with two bedrooms and one bathroom, for example, may be a wonderful buy. However, the reason it is so cheap is because the area’s predominant demography is families, and no one wants a home so tiny. This might be a bad investment.
2. When purchasing rental property, location is always important.
The importance of location cannot be overstated. There is a reason why it is a cliché. People like to live near where they work and play. A residence near a city center or significant employer will almost always cost a higher rent. The same holds true for a house near a beach, entertainment center, or other popular features.
Of course, you will have to pay a premium to acquire a rental home in a desirable area. You will need to perform the arithmetic to ensure that it is still a fair bargain based on your own position and the aspects that are important to you.
3. The standard rent is 1% of the home’s worth.
A popular rule of thumb for determining a decent price when purchasing rental property is that the monthly rent should be at least 1% of the home’s worth. If you spend $100,000 on a rental property, you can expect to get at least $1,000 each month in rent.
This is just a guideline and may change depending on local market circumstances. Profit margins may be smaller in more competitive areas, or you may initially accept a lower rent because you anticipate prices will grow faster than inflation. If you intend to make big improvements to the property, you may be able to recuperate those expenditures by charging a higher rent.
4. The tax benefits may vary.
You are running a company if you acquire rental property primarily to rent it out. That is, you may usually deduct maintenance and upgrades that a homeowner cannot.
However, you may be required to pay income taxes on your rental revenue. Furthermore, you may not be eligible for principal home property tax exemptions and may have to pay a higher property tax rate.
More information may be found in our Rental Income Tax Guide, or you can see a tax professional for guidance suited to your unique circumstances.
5. Property rental is a dangerous enterprise.
Even if you do everything correctly as a landlord, you may lose your investment. A renter might do significant damage, or an economic downturn could result in a loss of rental revenue, leaving you unable to pay your mortgage.
COVID-19 is a prime illustration of the dangers that landlords face. With massive job losses and eviction moratoriums, many small landlords whose tenants were unable to pay their rent found up losing their rental properties or spending years of savings to retain them.
6. You are in charge of upkeep.
You are responsible for leasing and upkeep as the landlord. This often entails having problems rectified as soon as possible rather than later. You cannot let your renters freeze if your furnace goes down in the midst of winter.
While you have considerable leeway in delegating maintenance duties to your renters, local regulations sometimes impose restrictions. For example, you may request that renters help with yard labor or snow shoveling. You can not usually hold them accountable for things like repairing the heat or hot water.
7. Review agreements with any present renters on the property.
If there are currently tenants on the property, you should discuss the rental agreement with them in detail and acquire a copy of any current leases that may effect your ownership and management rights in the property.
8. It is critical to record everything.
When you select a renter, make sure you have all of the documentation necessary to assess and rent to tenants, as well as maintain your property.
