COSTS TO CONSIDER WHEN PURCHASING RENTAL INVESTMENT PROPERTY
May 3, 2021
The process of searching for investment rental property can be exciting; however, before you get too excited it is important to run some preliminary numbers to make sure you know exactly what you are facing to ensure a successful investment.
First, you need to carefully examine potential rental income. If the property has already served as a rental property, you need to take the time to find out how much the property has rented for in the past and then do some research to determine whether that amount is on the right level or not.
In some cases, properties may have rented for lower than they should have while in other cases a property may be over-rented. Look at comparables in the area to make sure you know whether the property in question is at the right level; otherwise, you may find that the amount you think you will be receiving in rental income is unlikely.
Mortgage interest is another area that should be considered carefully. Make sure you know and understand prevailing interest rates as well as the details of your specific loan, because mortgage interest is the biggest cost you will face when purchasing investment property.
Many homes and duplexes tend to have loan structures that are like any mortgage loan, however larger properties rates tend to be higher.
If you are interested in or looking at or investing in commercial properties with even more units; the matter of terms and rates is completely different. Typically, the more money you can put down on the purchase of the property, the less interest you will have to pay.
Taxes are another issue. Many people use the taxes from the year in which the property was purchased to assume they can use these figures to estimate expenses. This is not always the case because taxes do not remain the same; they frequently change every year. Generally, taxes go up after a property is purchased. This is especially true if the property was previously owner occupied. So, it is typically a good idea to just assume that the taxes will go up on the property after you purchase it.
One area which many people fail to take into consideration is the cost of the property being vacant. While you would certainly hope that your property would remain rented all the time, this simply is not realistic. There will probably be times when your property will be vacant. Generally, you should assume that your property will have an average 10% vacancy rate.
The cost of tenant turnover should also be taken into consideration. This is often a big surprise to many landlords who assume they will rent out their properties and their tenants will remain in the property for some time. Even more of a surprise is how much it costs to prepare the property to rent out again. Just a few of the costs include advertising for a new tenant, repainting, cleaning, etc. If there are internal damage to the property, the total cost of repairing this may not be fully covered by the security deposit.
The cost of insurance should also be taken into consideration. Keep in mind that the insurance for investment properties is generally higher than an owner-occupied property. Make sure you obtain a quote rather than just using the insurance cost for your own home as an estimating guide. In addition, make sure you take into consideration not only property insurance but also liability insurance as well.
Utility costs is another area that are frequently under-estimated. If the property has already served as a rental property make sure you find out exactly what the owner pays for and what the renters pay for. You should also make sure to find out whether you will be responsible for other costs such as trash collection.
Finally, take into consideration the costs of property management if you will not be managing the property yourself.
Written by Savvy Sapphire xx
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