What to Look for When You Buy Investment Rental Property | Investments

What to Look for When You Buy Investment Rental Property

Written by Joaquin Schnegle

Sunday, 20 September 2009 03:58

by JoaquinSchnegle

There are a few essential considerations to keep in mind when searching for investment rental properties. From the very start, you ought to know precisely what you have at stake to ensure the future success of your investment.

You need to understand the potential rental income. For instance, has the property already been in use as a rental property? If so, you need to find out the amount that the property previously rented for as well as research whether the amount is current for the location or not. Keep in mind that some properties may have rented in a lower or over the amount that is current for the location. Ask around to find out whether the property is on target with comparable properties. By doing so, you can determine if you will get the amount, you think you should or if your expectations are improbable.

Be sure to carefully consider the mortgage interest, since it will probably end up being the largest cost you have to deal with when purchasing a rental property. Because of this, it's important that you fully understand the specific details of your loan and its interest rates. While most houses and duplexes have a similar mortgage loan structure, larger properties such as triplexes will probably be somewhat higher. Also, terms and rates are significantly different for commercial properties, which have more units. As a general rule, the more you invest in the down payment, the less interest you'll end up paying on the property.

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.

It's natural for you to hope that your rental property is going to be rented at all times, but this isn't realistic. You'll have to allow for the expenses of a vacant property and keep them in mind, since in all probability your investment property will have 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.

A common error many property errors make is to underestimate the true cost of their utilities. If you've purchased property that was previously rented, you should find out what you pay for as opposed to what your tenants pay for. Who pays for waste disposal, for example. It's important to figure out what exactly your responsibilities are.

And, as a final consideration, you'll have to calculate the expenses of managing the property. This, too, is an overlooked cost, but an essential one to remember if you don't intend to manage the investment property yourself.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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