The 7 Things to Consider When Buying a Rental Property
Planning goes a long way when buying your first rental property, just as with any other endeavor in life. Planning in real estate involves setting up your goals, finances, doing your research, and general real estate market analysis. If you plan your investment right, everything that follows in the process can go smoothly.
What are you planning and researching for? Location, real estate trends, property prices, real estate laws and regulations in your state, general state of the economy, job growth, and demographics. Take everything that could have an effect on your real estate investment into account before buying a rental property.
This is what will usually come up first when you start your real estate research for buying rental property. Location in real estate includes the state you intend to invest in, the city, the neighborhood, and even the street. Where you choose to invest in real estate determines a lot about the return of your investment.
So what does a good location have in real estate? Here are a few things to keep in mind when considering the location. We’ve highlighted the strategy specific to the trait in parenthesis (Airbnb vs Traditional rental strategy).
- Proximity to city center/central amenities (Airbnb)
- Safety (Airbnb and Traditional)
- Good school district (Traditional)
- Easygoing Airbnb laws (Airbnb)
- Landlord-friendly laws (Traditional)
- High demand for rental property (Airbnb and Traditional)
To search for the best places to invest in real estate, use Mashvisor’s search tool. Look into any city or neighborhood to gain access to real estate comps and information on expected rental income and rate of return on a rental property (CoC return and cap rate) for specific properties and neighborhoods in general.
3. Rental Investment Strategy
This has to be one of the first things to consider when buying a rental property. It is essentially a determinant of everything else. Investing in an Airbnb property is much different than investing in a traditional rental property. Where you search for property will differ, so will your management style and other factors, right down to how much rental income you’ll make every month (and even how often you make it!).
You need to explore in detail what each type of real estate rental investment requires. The real estate investment strategy can change everything for you. So make sure you choose the right one for you and for your lifestyle.
4. Costs and Expenses
Many real estate investors are often caught by surprise by how many expenses and costs there are when investing in rental properties. There are fixed and variable costs. Some costs and expenses you’ll encounter include:
- Insurance costs
- Closing costs
- Broker fees
- Marketing expenses
- Maintenance and renovation
- Property taxes
Why is considering these important? Because at the end of the day, you should be looking at your net rental income, that is, rental income after deducting costs and expenses. Ultimately, you should be working towards a profitable rental property, and that comes by managing your costs and expenses well. After all, there’s an opportunity to increase your net rental income from an income property by decreasing your variable costs and expenses.
5. The 1% Rule & the 2% Rule
The 1% Rule and 2% Rule in real estate dictate that when buying a property, your expected rental income should equal to no less than 1% in the 1% rule, and 2% in the 2% rule of what you paid for the investment property.
Say you want to buy a rental property for $200,000. Under the 1% Rule, your rental income should equal no less than $2,000, and no less than $4,000 under the 2% rule. These rules are good measures for a cash flow investor, but they aren’t everything. A real estate investor should take other factors into account like appreciation, expenses, type of property it is, etc.
So are there rental properties that meet the 1% and 2% rules? Definitely, but they’re also not everywhere. The rules are more of a guideline or a suggestion than a concrete rule to strictly follow. You can buy rental properties that do not meet either of the rules but that are still profitable.
Return does not come without risks. And you could face several risks in real estate. Here are a few:
- Bad tenants or when buying a vacation rental property, bad Airbnb guests
- Legal Airbnb issues – say you bought an Airbnb rental property in a city with lenient Airbnb laws. They could change, changing everything else for you.
- High vacancy rate for rental property – for both traditional as well as Airbnb rentals can face this issue.
- Negative cash flow – where your expenses, costs, and mortgage exceed what you’re making in revenue. This is what distinguishes a good rental property from a bad rental property.
- Unpredictable real estate market – you could have done everything right, but things seem to just not work out for you.
- Structural problems – you can’t always note what problems there are in an investment property. Dealing with these can drive up repair and maintenance costs.
Some real estate investments have more risk than others, but none of these should ward you off from investing in rental properties. Learn about the risks and understand them so you can better mitigate them.
Want to learn how to lower the risk of real estate investments? Watch the video below!
7. Property Management
This is another important point on our list of things to consider when buying a rental property. Will you be hiring professional property management to help you when investing in rental properties? Property management services you with every aspect of your investment, from searching for a rental property to marketing, managing tenants (or Airbnb guests), to selling the property if you need to.
If you’re looking to grow your investment and to diversify your real estate investment portfolio, definitely do consider professional property management. And if you do choose to hire property management services, remember to account for the cost in your budget. If you’re managing your rental investment property on your own, you also need to account for the cost – in this case, it’s your time.
Ready to buy a rental property? Start your search now.