If you’re considering investment property to put your extra
cash to work, you’re not alone. How do you decide whether this is the right
choice for you? Start by identifying the costs of purchasing, owning, and
managing a rental and researching rents in your area to determine how much income
to expect. You’ll also need to consider the risks involved with rentals and
decide whether you want to put the time and effort into managing a rental
property.
Look at the Numbers
Unless you’ll be paying cash, a good first step is to talk
to a lender. Find out what loan amount and interest rate you qualify for, and ask
the lender for a list of all costs associated with the loan. Rates for
investment properties are typically higher than those for primary residences,
and down payment requirements may be higher as well. It pays to shop around: not
all lenders offer the same types of loans.
Other expenses to include in your cost estimate are property
taxes, insurance, association fees (if any), and ongoing maintenance. Be
realistic about how much it will cost to keep the property in good condition so
that you can continue to attract renters.
Don’t forget to factor in the transaction costs (closing
costs) incurred when buying and eventually selling the property. Finally, talk
to a tax accountant about how rental property ownership, including rental
income and depreciation, will affect your taxes.
Once you’ve evaluated the costs and tax implications, you’ll
be in a good position to determine whether monthly rents in your area will make
the investment worthwhile.
Consider the Risks
Owning investment property can be profitable but is not risk
free. Some of the risks include late rent payments and damage to property
caused by careless or unhappy tenants.If tenants lose their jobs, they may miss rent payments altogether. If
this happens, how will it affect your finances?Will you be able to keep up with your loan payment and other expenses
associated with the property?
Unlike a money-market fund you can draw on when you need
cash, real estate is not liquid, and its value varies depending on market
conditions. If you have an unexpected need to sell, it may happen when the
market is going against you. Even in a good market, it usually takes at least six
to eight weeks from listing to closing. In a buyer’s market with a surplus of
houses for sale, selling can take much longer and sale prices can be
disappointing.
Is it the Right Fit for You?
Rental property management includes finding tenants,
handling tenants’ calls about problems, arranging for repairs, and sprucing up
the property for the next tenants. Some people decide against investing in a rental
because they don’t want the hassle and don’t think the income generated would
justify hiring a property manager. Others don’t see managing a rental as an
obstacle, especially if they have extra time and are handy enough to do some of
the maintenance and repairs themselves.
Deciding What to Buy
Once you make the decision to move forward, you’ll need to
find a property. Many rental owners prefer townhouses or condos where the
homeowner’s association handles some of the maintenance. Others focus on
single-family homes in good school districts. With the trend toward working at
home, some tenants may want a home office or at least some kind of workspace.
When you find a property to buy, make sure your offer
includes all the relevant inspections so you can identify problems before
taking ownership. Try to negotiate repairs with the seller to minimize your costs
later on.
If you’re willing to take on the responsibility and assume
the risks, rental property may be a profitable addition to a diversified
financial portfolio. And if the current shortage of homes for sale continues,
the pool of potential renters could increase, making it easier to find reliable
tenants.
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Market Value and Appraised Value?
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Inspectors
See more of Annette’s articles on
related real estate topics. If you’re planning
to buy or sell a home, contact Annette at (610) 247-7892 or annette@preferredhomes.com
#Realestate #housing #rentalproperty #investmentproperty
Copyright (c) 2020 by Annette
Nelson. All Rights Reserved.
