What should rental property investors watch out for when buying properties?
It is important for investors to know what to look for and what to look out for in a potential rental property. The Forbes Real Estate Council offers guidance on what to consider when investing in rental properties. Here are some of the top things to consider.
1.Natural Disaster Risks
Between wildfires, hurricanes, snow storms, tornadoes, earthquakes, and sinkholes, it can be hard to find a location with no natural disaster risks. Yet, it is important for investors to know what they are, and the potential additional costs in insurance.
2. Crime Rates
Watch for high crime rates. They cannot only be a warning of potential property damage, but an area undesirable for both tenants and future buyers.
“The location of a house is just as important as the house itself. You need to choose an area wisely, making sure it’s a place where tenants will want to live.” – Abhi Gohlar
3. High Property Taxes
High property taxes take a bite out of your profits. In some areas, investment property, vacant property or foreign-owned property taxes may be even higher. Due diligence before buying is in order.
4. Properties That Don’t Meet the 1% Rule
As a basic guideline, rental property investors should look for investment properties that can rent for 1% of their cost per month. For example; a $100,000 home should be able to rent for $1,000 per month. But don’t stop your analysis there. Formula tools and calculators to help you determine the real numbers like Net Operating Income to help make sure you are investing in a profitable property.
5. Safety Issues
Landlords need to ensure safe and healthy housing conditions for renters. While some safety conditions are common sense, others are dictated by local code. Check the rules and regs in your area to make sure the unit meets requirements.
6. Major Renovations
Condemned, burned out, or outdated properties can present profitable opportunities. However, major structural and functional repairs can mean extended periods of vacancy, and negative cash flow. Be sure you know how long your unit will be vacant and what the holding costs will be.
7. Property Management Rates
When considering a rental property purchase, landlords always need to ensure there are adequate finances to cover professional third party management. Even if you choose to take the DIY management approach for now, you must be covered for the unexpected. You may need to retire early, spend time away, or take an extended break for medical and health reasons. Plus, even as a DIY property manager, you need to pay yourself.
Do your homework – know your market, network with other investors and verify your numbers before investing in rental property. A good rental property can be a fantastic asset that throws off monthly cash flow, appreciates in value and provides tax benefits but it always pays to do your due diligence and work from a solid set of numbers.