What to Expect When Investing in a Rental Property

While less common than a few years ago, there are still some good deals for borrowers wishing to buy a rental property. This is despite localized increases in home prices and mortgage rates. But even with excellent investment opportunities, smart investors should familiarize themselves with costs other than mortgages and interest.

All investment properties have visible and hidden costs, which can sometimes be risky. This is despite the promises of monthly cash flow and long-term appreciation. So before you begin looking for rental properties, do the math to determine whether or not buying a particular property will end up being profitable.

Here are some things to take into account:

Down Payments and Interest Rates

Due to rising rental rates, buying rental properties has emerged as a leading investment opportunity. However, since lenders view these as riskier investments, a minimum 20 percent down payment and a 0.75 percent higher interest rate are usually required. This is particularly true for properties with three to four rental units.

Property Taxes

Property taxes can considerably increase the cost of a property depending on where you buy. To confirm that the taxes noted on the Multiple Listing Service (MLS) are accurate, check with the municipality before making final decisions. Also, you should find out what services are covered. For instance, will taxes include trash collection and sewer services?

HOA Fees

There are monthly fees associations with certain condominiums and homeowners organizations. Your budget needs to account for this as well. You should also confirm that there are no rental restrictions if the apartment is part of an association. You may also want to find out how rule changes occur so that you don’t have to worry about COA or HOA restrictions in the future.

Homeowners Insurance

Depending on your region, homeowners insurance might vary dramatically, especially if your property is in a zone vulnerable to fire, water, or other risks. Before signing a contract for the property, be sure to talk rates with an insurance professional. Take special note of what is not covered and if there are any supplemental plans you may want to consider.

Utilities

The tenants usually pay for utilities like electricity and gas. Other services, however, such as water and sewer, are included in the rent and, therefore, are covered by the landlord. To help plan for utility costs and to figure them into your rental rate, contact the respective utility companies and ask for an average monthly usage for that property.

Maintenance and Repairs

In most cases, it’s recommended that you figure 10 to 15 percent of your annual rent will go to the property’s maintenance, repairs, and upkeep. Of course, this is on top of any damage potentially caused by a tenant, although their security deposit should cover that cost.

You will want to keep your rental property in as good condition as possible so that you will have no trouble renting it to a new tenant when one leaves or in case you decide to sell. This approach should help maximize the value of your property.

Vacancy Coverage

Don’t assume your rental units will constantly be filled. You should allow for a month or two of vacancies per year. That said, you should check out the area of your property and the occupancy rate of similar nearby properties to get an idea of what the rental market is like and how often you can expect to deal with a vacant unit.

Tenant Searches

Finally, finding quality tenants can cost money in advertising, vetting, and time spent giving viewings. To cover these costs, some landlords charge potential tenants a non-refundable application fee—typically between $25 and $35.

You could also consider hiring a property management team or real estate agent to handle tenant searches for you. While paying for these services costs more, you can save money by acquiring high-quality tenants who pay rent on time and take care of the property, thereby costing you less in repairs and headaches.

Figuring It All Out

If you are still making a reasonable profit after tallying all of these costs, purchasing a rental property is a good investment opportunity. To ensure that your investment in a rental property continues to bring in money each month, create a detailed budget and remain on top of rent collecting.

Follow your budget and adjust as needed.

Investing In Charlotte Rental Properties

Investing in rental opportunities can be a great way to generate monthly income. Even though the process requires careful planning, the rewards can be significant and frequently serve as the impetus for additional real estate purchases.

This is where knowledgeable home investment advisors can provide you with more information if you have any questions. Contact Henderson Investment Group before purchasing your next rental property to see how you can make the most of your investment.