Here Are Three Things to Consider Before Investing in a Rental PropertyAdmin@ | October 31, 2019 | 0 | Real Estate
Investing in a rental property is a big decision. Although it can be profitable, there are some risks, and there are many things to consider before starting (or investing in) a rental property business. Here are a few things to keep in mind:
Yes, it has been said a trillion times before, but it is worth repeating one more time. Location is perhaps the most important driver behind the success or failure of rental property investment.
Many people think of location as being a particular address in a given neighborhood, but the location is also a spot within a larger area, such as a county, a city, a region in a state, or even a state or country. It is important to know what other landlords and property management companies in an area are charging for similar properties and what type of amenities and services they offer. This knowledge allows property investors to establish competitive rates and market their rentals effectively.
Before buying a property or investing in renovations, it is crucial to examine the location for potential barriers and opportunities for financial success.
Like location studies, housing trend research provides clues about current market conditions and projections based on historical performance and other indicators, such as the average selling price, new construction, and home sales numbers.
Understanding the various housing market indicators, helps prospective landlords decide if the time is right for entry into the rental business or if it would be better to wait. Following trends and digging into data about who is buying, who is renting, and why, is also important to know, so that you can figure out your target market. One study showed that more than three-fifths of Millennials who purchased a home in 2018, reported having buyers’ remorse. Among the baby boomer group, the number of disappointed buyers drops to only thirty-five percent. Wise rental property investors also keep a close eye on changes in the way specific demographics view homeownership because as the desire or ability to buy a home declines, more rental properties are needed.
Before making a rental property investment, most financial consultants would recommend you try to evaluate the profit potential. A few simple questions may review previously undiscovered performance potential or shortfall.
- Can a prospective property generate net operating income? That is the amount of income left over after paying expenses such as a mortgage, insurance, taxes, maintenance, utilities, and payroll, if necessary.
- Are there renovations that would offer a healthy return on investment in the form of higher rents and added revenue streams? For example, could bike storage or gym facilities generate fees to offset the cost of construction and maintenance?
- Is there a persistent shortage of safe, affordable rental housing in the area? Housing shortages contribute to consistent, higher rent revenues for property owners.
Considering these three things before investing in rental property could mean the difference between making a wise decision and having buyers’ remorse like those Millennials that failed to consider the ongoing costs of ownership before buying a home.
Becoming a landlord can be a profitable venture for those who invest in due diligence first.