If you are considering buying an investment property, there’s a lot to know before you leap. You will become a landlord, or you may entrust your property to a property management professional. You’ll need knowledge of leases, local building codes, and eventually mortgage loans if you are using financing to purchase.
If you choose to act as the landlord, you’ll need basic handyman skills to knowledge of tenant law. You’ll also need to evaluate if the apartment needs fixing up or not, and if you can do the work yourself. While investing in a rental property can be a great way to earn extra income, it will require money, time, and commitment.
Also, not every property may be easy to rent out. Before you buy your rental apartment, consider these factors.
Rental Property Demand in the Area Where You Want to Purchase
If the area where you are considering purchasing an apartment has a very high rental percentage among residents, this generally indicates a high demand for rentals. Neighborhoods with lots of rental vacancies will indicate that the rental market is not strong.
You will also want to consider the population growth in the city where you are considering purchasing or a lack of growth. Municipalities with bustling economies and an increase in job growth tend to attract new businesses and residents.
Is There an Annual Increase in Local Rental Fees?
If the rental market sees an increase in rental prices annually, this is a solid indicator that the rental market is healthy and strong. It’s worth investigating why the rental market is florid. The cost of purchasing real estate may be prohibitive for many, or the type of resident may just prefer renting to owning.
Investigate the Neighborhoods
Don’t stop at the choice of a city or town. If you have decided on the best municipality, move on to investigating neighborhoods. Every neighborhood presents advantages and risks that can significantly impact rental success, property value, and the kind of tenant attracted to your property. When evaluating a neighborhood, verify neighborhood home values, employment rates, local schools, medical facilities, and neighborhood amenities.
Who Are Your Potential Tenants?
Research local demographics to determine the kind of tenant that rents in the area. Are they professional people, young families, or seniors? Considering who your potential tenants might be can contribute when evaluating if the location you are choosing has a future.
The Condition of the Apartment You Wish to Purchase for Rental
Is the apartment in a new residence, is it older but well-maintained, or will you need to renovate it before renting it out? If you have the necessary skills to renovate, a fixer-upper may be a great opportunity economically in terms of investment. If an apartment requires significant repair work and you are not a skilled handyman, you can probably do with some professional advice before buying . Properties that need work can translate into liabilities if a tenant falls ill or is injured.
For an investment property to be profitable, it must pay all operating expenses before turning a profit. This is especially important if the apartment purchase is financed through a mortgage. Expenses to be aware of include rental marketing and advertising, tenant screening, leasing procedures, management fees, pest control fees, landscaping fees, maintenance, repairs, insurance, residence fees, service fees, mortgage payments, and mortgage interest rates. It’s wise to research these costs and prepare a hypothetical budget of associated costs.
Local property taxes can make quite a dent in a profit margin especially if the area has high property taxes. Verify if rental properties have higher property taxes than primary residence. Also, consider the taxation of the generated income and any detraction advantages when filing tax returns.
Insurance Needs and Costs
When renting out a property, you’ll want landlord insurance. This kind of insurance policy will include not only property protection coverage but liability protection if a tenant or a tenant’s guest decides to sue you. Additional coverage can be purchased for burglary, vandalism, or even rental income loss if you are counting on the extra income.
If the rental apartment is under construction, it can be insured as well as if you must repair it and bring your investment property up to code. If you are purchasing a property that is not newly constructed, verify if the previous owner made insurance claims on it as this can influence your costs if the provider counts claims against the property rather than who made them.
Security comes with a price tag but can be an attractive feature when courting renters. A security presence on the premises, Wi-Fi access control, CCTV for buildings and parking garages, as well as smoke, fire, and flooding detection tools, can be very attractive to tenants and contribute to the overall protection of your investment property.
Property Management Professionals and Reserve Funds
If you plan on using a property manager or management company, you’ll need to factor in annual costs. Property management professionals will minimize your work as their tasks include:
- prepare the property for occupancy
- advertise and market your property
- screen potential tenants
- collect rental fees and assess late fees
- enforce contract terms and manage evictions
- manage maintenance as well as repairs
- inspect the property when tenants leave or change
- manage compliance with housing laws
- suggest warranted rent increases
- provide financial reports
It also may be in your interest as a rental property owner to establish and fund a reserve account for necessary improvements and repairs. This financial cushion means you’ll be prepared if unexpected intervention on the property is required. Consider the age of the apartment as well as recent renovations.
Owning an investment property can prove to be rewarding financially, but this kind of investment comes with responsibilities and some risks. So, it’s wise to be well-informed before selecting a property and purchasing it.