8 Things to Consider Before You Buy Investment Rental Property

Posted on | September 20, 2009 | No Comments

When looking for an investment property or a rental property, there are a few fundamentals you should always have in mind. From the very beginning, it’s imperative that you know what you’ll need to ensure the success of your investment.

Understanding the potential rental income is the first requirement. For example, has the property in question been used as a rental property before? If this is the case, you’ll have to discover how much the property was previously rented for, along with finding out whether that amount is appropriate for its location. Consider that some properties might have been rented for higher or lower than their locations might warrant, so check around to see if your property is on target with comparable properties to determine whether or not the amount you’re looking for is realistic.

You also need to consider the mortgage interest carefully. Since the mortgage interest is the largest cost you may have while purchasing an investment property, you need to know and understand the details of your particular loan as well as the interest rates. The majority of homes and duplexes have similar mortgage loan structures. Triplex and larger properties tend towards being a bit higher. The matter of terms and rates are completely different when you are considering commercial property with more units. Generally, the higher your down payment on the property the less interest you will pay.

You will also need to consider the taxes. Many individuals may consider the previous year’s property taxes when the property was first purchases and then presume these figures will be the same to estimate their expenses. Since taxes generally change from year to year, this is not always the case. Taxes generally increase after a purchase, especially if the property was previously owner occupied. It is in your best interest to assume the property taxes will rise after your purchase.

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.

You will also need to consider tenant turnover, and never simply assume that your tenants will stay in the property for any length of time. You also need to consider the cost of preparation for renting the property again. These costs may include, advertising for new tenants, cleaning, repainting and so on. There is also the possibility of the security deposit not being enough to cover all the damage after a tenant vacates the property.

Yet another thing to consider is how much insurance might cost, while remembering that insurance for an investment property is usually more than a property occupied by an owner. Also, you’ll have to think about liability insurance in addition to property insurance. Look around for a solid quote, don’t just estimate the expense based on your insurance costs.

Many rental property owners will under estimate the cost of utilities. If you purchase previously rented property, you need to know exactly what you pay for and what your tenants pay for, to find out what you and they are responsible for while renting to a tenant. For instance, is waste disposal your responsibility and so on?

Finally, it’s a good idea to consider how much property manage will cost you if you’re not going to be managing the property yourself.

Joaquin Schneggle has worked closely with investment property owners for more than twenty years as lawyer, counselor, and landlord. He provides practical free rental forms for every state on his Landlord Law website.

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