8 Things to Consider Before You Buy Investment Rental Property
Sep 19, 2009 Real Estate
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While searching for investment rental property, there are some essentials you should keep in mind. From the very start, you need to know exactly what you have in store for the future success of your investment.
You need to understand the potential rental income. For instance, has the property already been in use as a rental property? If so, you need to find out the amount that the property previously rented for as well as research whether the amount is current for the location or not. Keep in mind that some properties may have rented in a lower or over the amount that is current for the location. Ask around to find out whether the property is on target with comparable properties. By doing so, you can determine if you will get the amount, you think you should or if your expectations are improbable.
Another thing you need to consider with care is the mortgage interest. Because the mortgage interest is the biggest cost you’ll probably encounter when buying an investment property, it’s important that you understand the details of your specific loan along with the interest rates. Most homes and duplexes have mortgage loan structures that are very alike. Triplex and bigger properties are generally somewhat higher, while rates and terms are completely different when a commercial property with more units is being considered. Generally speaking, the bigger your down payment on the property, the less interest you have to pay.
Taxes will also need to be taken into account. Most people simply look at the property taxes from the year before the investment property was purchased, and assume that figure will be similar when they estimate their costs. However, since taxes usually change from one year to another, this isn’t always true. Taxes often increase after a purchase, particularly if the owner previously occupied the property, so it’s clearly a good idea to presume that the property taxes will increase after you’ve purchased the rental property.
Although, you may hope that your property is rented all the time, this is not reality; you need to consider the costs of vacant property as well. There are times when your property will be vacant by nearly a ten percent vacancy rate.
Tenant turnover is something else to keep in consideration, since as much as you’ll want to assume that tenants are staying in the property for awhile, you can’t take it for granted. And when tenants leave, a bunch of costs suddenly appear, as you’ll need to prepare for renting the property again. These expenses can include things like repainting, cleaning, and advertising for new tenants. And it’s usually wise to expect that the security deposit won’t cover any damages left behind by the tenants.
Insurance costs are something else to remember, especially since the property insurance for an investment property is likely to be higher than a property that an owner was occupying. Not only that, there’s also liability insurance to consider as well. Make sure you research quotes instead of estimating the cost yourself.
A common error many property errors make is to underestimate the true cost of their utilities. If you’ve purchased property that was previously rented, you should find out what you pay for as opposed to what your tenants pay for. Who pays for waste disposal, for example. It’s important to figure out what exactly your responsibilities are.
Lastly, you should consider the costs of property management if you are not managing the property yourself.
Joaquin Schneggle has worked closely with investment property owners for more than thirty years as lawyer, adviser, and property manager. He provides excellent free rental forms for every state on his Law for Landlords website.
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Tags: INVESTMENT, Investment Property, investment rental property, Landlord, legal, property management, Real Estate, Rental Investment, rental property
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