Although it may be a daunting task, owning a rental property can be a rewarding investment. Rental properties have the ability to put extra cash in your pocket – so long as you do your homework.
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We’ve put together a shortlist of what to consider when looking at and buying rental property.
1. Singles or couples
What should you be looking for in terms of the physical property?
Generally, single-family homes are your best bets. First, people living in single-family homes are either couples or families and these tend to be longer term rentals. Couples/Families even tend to pay rent more regularly (without hassle) than single people and are generally more financially stable if it is a dual-income household.
Looking for a property that has appreciation value is important as well. You’re looking for something that, with a just a little bit of handy work, or even some more sophisticated renovations, the property could attract renters willing to pay higher rents.
2. Location, location, location
Ah, the classic real estate adage; the neighborhood itself will dictate how much you can charge for rent but there are other factors also. You’ll have to look at how expensive property taxes are. You’ll also need to consider that proximity to good schools can be a major factor. If you’re near a good elementary or high school the value of the property will go up. If you’re near a university, on the other hand, you’ll most likely be dealing with students. University students mean more vacancy, less money and potentially more headaches.
Source: Sage Stossel
Neighbourhoodsclose to dense job markets are in high demand. A lot of people want to live close to where they work. You’ll also want to look at what the future has in store for the community you’re looking to buy in. Are there projects in development that could help attract people to the neighborhood? Conversely, you don’t necessarily want more condos being built in your area because that could drive your price down. An area with parks, public transport, and a ton of restaurants is going to be easier to sell to a potential renter.
One more thing. This may sound obvious but your proximity to the rental property is important too. If you intend to manage the property yourself, it’s actually in your best interests to find a place near where you actually live. Travel times can sap your energy and you want to be able to be a hop, skip and a jump away from your tenants in case any issues arise. You can always hire a property management company but that adds a layer of middle management that eats into your bottom line.
3. The one percent rule
The One Percent rule states that the gross monthly rent should be at least one percent of a property’s final price. If you buy a property for $180,000 and then invest another $20,000 in renovations, that’s a final price of $200,000. 1% of that is $2,000. Ideally, that’s how much you want to collect in rent every month.
This rule can be used as a guide to help with buying decisions because if a property meets the one percent rule it is a good bet that the monthly rent earned from the property will be equal to or greater than the mortgage payment.
If you do that it means the property is paying for itself. Actually finding viable properties that meet the 1% rule will be tough but it’s a good way to force oneself to hold out for real quality.
There will be sleepless nights and stress filled days as the owner of a rental property. It comes with the territory. Fortunately, the big picture is a rosier: if you take the right steps, owning a rental property can be a huge boon to your bank account and savings.