Costs to Consider when Investing in Rental Property

The process of investing in rental property can be exciting; however, it is important for you to run some preliminary numbers to ensure that you will make a profit from your investment.

Firstly, you should examine potential rental income very carefully. You need to take the time to find out how much the property has rented for in the past in case the property has already served as a rental property. You must also do some research to determine whether the expected rental correct or not. Talk with property managers and real estate agents to find out what comparable properties in the area are renting for. For a small charge you can get a professional rent appraisal done.

Before investing in rental property it is important for you to find out what is the realistic rent you can achieve from the property. In your excitement do not work with the most optimistic figures. Look at the figures carefully to find out if the property in under rented or over-rented. Also check if there is possibility for you to make improvements to increase the rent.

Another area that should be considered carefully is the prevailing mortgage interest rate. Mortgage interest is the biggest cost you will face when investing in rental property. You must not only be familiar with the interest rates but also the terms and condition of the lender. Firstly, understand that single family homes and duplexes tend to have very similar mortgage loan structures. With a larger property with multiple rents interest rates tend to be higher.

Properties that have more than four units are treated by banks as a commercial property; the matter of terms and rates is completely different. Typically, the more money you are able to put down on the purchase of the property, the less interest you will have to pay.

Property taxes are another area you have to study carefully . Do not assume that taxes will remain same from the year in which the property was purchased and these these figures to estimate expenses. This is not always the cases because taxes do not remain the same; they typically change every year. Taxes normally go up after a property is purchased. This is especially true if the property was previously owner occupied. You must factor an increase in taxes to what they are at present.

Another important factor you must take into consideration when investing in rental property are the vacancy rates and how it will affect your cash flow. It is not realistic to assume that your property would remain rented all the time. This simply is not realistic. There will be times when your property will be vacant. Vacancy rates differ from location to location. Generally, you should factor in a vacancy of 10% in your calculations.

Tenant turnover can result in additional expenses. You should take this into consideration. every time a tenant vacates you will need to prepare the property to rent out again. Some of the costs may include not only advertising for a new tenant but also repainting, cleaning, etc. If damage was done to the property, the total cost of repair may not be fully covered by the security deposit you charged. In rough areas it is advisable to take out a landlord insurance for peace of mind.

Utility costs are another area that investors frequently tend to under-estimated when investing in rental property. You must find out exactly what the owner pays for and what the tenants pay for and put this in the rent agreement. You should also make sure to find out whether who will be responsible for costs such as trash collection, lawn mowing, maintaining the plants and swimming pool.

You must take into consideration property insurance costs. Keep in mind that the insurance for investment properties is usually 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.

Finally, take into account property management costs if you will be using the services of a rental property manager. These can typically vary from 5% to 8% of the rent received plus GST.

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