Let’s start with the basics. To pick the right rental property, be it brand new homes or old fixer-uppers, you need to know what you are investing into, how you intend to recover the costs and the benefits that come with it.
An investment property is essentially any real estate that is not bought with an intention to use or inhabit. These are generally bought with the intention of getting the returns by flipping, renting or holding it until the market goes up to make a profit on the selling price. A rental falls under the category of an investment property.
A rental is a property that the investor buys with the intention of renting it, in order to gain returns in terms of monthly paychecks. Rentals can be of different types – residential, commercial, retail, etc.. Single-family homes, apartments, duplexes, and similar properties fall under residential rental properties. The tenants generally lease the property for a longer duration as compared to the commercial tenants. Such properties are generally owned by individuals or families. Commercial rentals can consist of properties used for commercial purposes, where the tenants occupy the property short term; this includes properties such as hotels, motels, office complexes, and retail warehouses. These are generally owned by large corporates.
Direct property investments such as owning a rental come with tax benefits, which indirect investments lack. On the other hand, a rental owner has to do their bit as a landlord in terms of facilities management, maintenance and legal upkeep of the property.
Now that you know what a rental is, it’s time to know how to pick the right one! We’ve listed down some tips to make this monumental task a little bit easier.
INVEST IN A SINGLE FAMILY HOME
Test the waters before you dive in. A single family home is easier to maintain, costs less and is easier to rent out as compared to a multi-family property. The house has less wear and tear as you only have a single tenant. It will allow you to dabble with book-keeping, repair, and other duties that a landlord bears, to see if you are cut out for it before taking on a larger project. Bigger properties also mean more taxes and more maintenance costs, and the supplementary rental income you make may not cover these costs. So, start small!
TIMING IS EVERYTHING
Buying any property cost big bucks, so a thorough evaluation of your finances is needed before you take the leap. Don’t invest because the top investment gurus say so in their webinar. Always assess the situation at hand, and make an honest evaluation of your financial standing. Here are a few points to consider.
– Will investing in a home/property affect your daily finances? In other words, can you continue to live a comfortable life after this substantial investment?
– What is your credit score?
– Is your down payment of 20% taken care of? This is likely the minimum you would need to get financing.
– Have you taken into account the closing costs?
– Would you be able to take on any repair or unforeseen expenses before you rent out the property and be able to make the monthly bank or mortgage payments
– Can your primary residence (if you have one) be used for financing?
If you are hesitant over any one of these points, hold off until your sort the issues and only then invest in a property.
LOCATION IS KEY
Property investment is a long term investment, thus it requires extensive research and planning. You can never research enough while buying your first rental. Job, population and infrastructural growth are the three markers that you should look at while researching for the ideal location. Let’s take a quick look at each of these in more detail.
Increase in the number of jobs: What makes a strong real estate market? Economic stability. What contributes towards it? Increase in the number of jobs in the market. The logic is simple, more jobs = inflow of potential workforce = need for housing + better financial standing = favourable market conditions.
Population Growth: Take any major city as an example, and one of the prominent reasons for the real estate boom in that city is most likely to be a population explosion. When demand exceeds supply, the market is tipped towards the seller and provides the seller with opportunities to capitalise on these favourable conditions.
Infrastructural Growth: The growth of the city and the above-mentioned points go hand in hand. As the infrastructure in the cities gets better, the standard of living and means to earn a livelihood improves, which attracts more and more people to that market, making it ‘THE’ location to invest in.
To find a location that would meet the above criteria requires extensive research and know-how of the real estate market. Getting professional help is recommended.
The majority of homeowners use a mortgage to buy a property, hence it is important to understand how it works in order to bring down your costs. Using leverage to borrow against will free up some of your finances which you can then use towards repairs and other expenses. It’s best to hire a refinance lawyer to read between the text in order to avoid any legal pitfalls.
DO A THOROUGH BACKGROUND CHECK
You bought a rental to rent it out to tenants, which makes them the significant other in this equation. If you want your rental to work, doing a thorough background check on your tenants is important to avoid future hassles. You can do this by checking their credit score and the landlord-tenant records in your area. Set down certain expectations right from the start, always in writing to be doubly insured. The next step is to contractualise the deal, and hiring conveyancing solicitors to draw up your legal papers is always a good idea, even if it means shelling out a little extra.
MAINTAIN A GOOD RAPPORT WITH THE TENANTS
No one wants a landlord from hell. While it is important to draw boundaries and set rules, don’t be unreasonable. Abide by the local rental regulations. Develop a rapport with the tenants. Help them out by suggesting friendly movers. Don’t ghost out once the deal is closed; be attentive to maintenance and repair requests and always value good tenants. It takes two to tango so make sure you are in tune.
These top tips will help you not only purchase your rental property, but make it a successful purchase that will reap long term rewards!