What to know when buying an investment property for rent?

October 26, 2021 . Financial Planning . 10 min read
investment property

Are you looking to invest in residential rental property? When chosen wisely by keeping certain points in mind, investment properties can be a highly lucrative option to reap huge rewards. However, real estate investments can be a bumpy road for people who haven’t done it before. Real estate can be difficult to navigate blind as it is filled with potential potholes that can easily trip you up and get rid of any returns. Hence, it is crucial that you perform complete research before you decide to get into the game. 

Here are some vital things to consider while buying an investment property.

1. State of the investment property

Investing in a property that needs to be fixed is a good idea, as long as you understand the money and time it is going to take to build the property to be presentable again. Once a professional has scanned your property, you need to have a thorough understanding of the number of repairs that can be done by you, and the amount that you will need outside intervention for. You also need to get a good idea of the expenditure you will encounter when you bring in professional assistance.

All the major problems will need to be addressed and fixed before you rent the property out, as it could have dire consequences if the tenant faces some distress because of pre-existing issues. So, get an estimate of the amount of time you’ll have to invest in repairing it before buying the property.

2. Neighbourhood

The neighbourhood is one of the most important elements that will dictate the kind of tenants and the number of vacancies you might encounter. In case, you choose a property that is near to a college, your tenants will predominantly be college students and you might not find it difficult to find renters during the summer vacations. You should also keep in mind that certain towns frown on rental conversions and will try to impede by adding unnecessary red tape and permit fees. However, most of the areas are quite rental friendly and are a great place to invest.

3. The 1% rule

One of the main questions new investors struggle with is the amount they should charge for rent. Many long-time investors swear by the 1% rule that basically means that you should get at least 1% of the amount you have purchased the house for in rent every month. So, if the house costs you Rs.50,00,000, you should end up with at least Rs.50,000 in rent. This isn’t a hard and fast rule. You can go higher or lower than this value as well. 

You can get an estimate of properties in the area you are looking to buy to get a good idea of the return you can expect on your property. You can of course change the listed price to suit your needs, but it does give you a good estimate.

4. Property taxes

Property tax is highly dependent on the specific area of your property, and might largely vary. So, you need to get a good idea of the amount of money you will be paying. High property taxes do not necessarily need to spell doom, as they could rein in tenants for the long term if the neighborhood is good enough. 

You can reach out to the municipal assessment bureau to get a better idea of the amount of taxes you will have to pay. Also, note if the taxes are due for a rise soon. You realistically would want to make some profit on the rent that high taxes will cut into. So keep that in mind.

Investing in a rental property can be extremely lucrative as it works as a source of income. However, you need to get a realistic idea of all the basic aspects of the rental investments before you jump in. Calculating the amount, you can charge for rent as opposed to the amount you will have to invest in it, will give you a realistic idea of the profitability you can look forward to. Keep the risks in mind too. Talk to people who have experience in this sector and who have dealt with long-term rental properties. It will help you get a bird’s eye view of the entire rental property investment industry and how it works.

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