3 Essential Things To Think About Before You Buy Rental Property

Posted on: April 20, 2011

Categories: Buy

Author: lbuen

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Wisely Buy Rental Property

Purchasing a rental property is not similar to buying a pair of shoes where you can buy impulsively and return it the next day when you decide that it is not a good fit. Before you buy rental property, give some careful thought to three important considerations that can greatly tell whether or not you will lose or make money from your investment.

Calculate 3 Things When You Buy Rental Property

1. Forecasted Rental Property Income

It is important to be aware of how much rent you can expect the property can rake in. Base this on where the property is located, the average rental rate in the area and the quality of its construction.

As an illustration, suppose you buy rental property for the price of $50,000. You discovered after some market research that properties within the location with similar quality to that of the one you bought are rented out at an average of $300 per month. To compute for the forecasted rental income, simply multiply $300 monthly rent by 12 months in a year to get $3,600. This is equivalent to 7.2% gross return. Before you can make any conclusions, you have to compute for the expenses you expect to make for a year as the owner of the property.

2. Forecasted Expenses In A Year

As you very well know, owning a rental property does not only mean raking in profits. Expenses are also incurred for the upkeep of the property. Expenses may come in 2 major forms: Fixed expenses are those that will be charged regularly to you whether monthly, quarterly or annually. These include annual property taxes, standard maintenance and repair expenses, insurance and payment for property management services. Variable expenses are those that do not occur as often but for which you must also be ready for as they often could be big ticket items such as the replacement of air conditioner, heater or water heater, flooring, fencing, plumbing or roof.

So to calculate your annual expenses, consider these additional assumed details to the example mentioned earlier. Let’s assume that your property taxes, insurance and regular maintenance amount to $500 annually. To cover for forecasted major repairs, you decide to save another $500 each year so that you have funds to use for big repairs.

So your actual net return is 2600 annually, that is, $3600 gross income less $1000 expenses. This is equivalent to 5.2% return. Of course, you would get this return with the assumption that your rental property is continually occupied all year round. This is a too-good-to-be-true scenario. You must make allowances for situations where you may have a hard time renting out the property and other associated risks.

3. Calculate Risks Of Investing In Rental Property

Before you buy rental property, you must realize that this business is not purely a bed of roses. There may be days when vacancy rates are high, decreasing your total net profit and may even possibly lead to a loss. The rental business is also at risk of dealing with the hassles of dealing with a bad tenant. This could incur you legal expenses should you be needing legal assistance to handle him, and extra repair expenses if such tenant inflicts damage to your property.

To help you reduce and manage these risks, you can delegate property management to a competent company that has the expertise in finding better tenants. However, be ready to part with about 10% of your rental income to pay for the said company.

There are investment property calculators that can help you easily compute these essential considerations and could give you details.

Owning an investment property can give you a steady source of income, but before you take the plunge and buy rental property, test the waters first by doing these calculations to save you from potential losses and heartaches.

 3 Essential Things To Think About Before You Buy Rental Property
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