Hunting for investment rental property is fun.
Ask yourself these 8 questions for each rental property you look at.
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What is the potential rental income from the property? If the property has been rented in the past, examine the historical rent rolls. Verify how much the property has been rented for. Low turnover may mean the rent has been too low. High turnover may mean just the opposite. Research comparable rental properties in the area. Above all, be realistic with your income projections.
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What rate of interest will I likely pay? Mortgage interest will be the single largest expense associated with your investment rental property. So always be aware of the prevailing interest rates in your area. Home and duplex loans will have structures that are similar to any mortgage loan. When you get into larger multi-family properties interest rates are usually higher. As a general rule, the larger the down payment, the lower the interest rate.
What are the property taxes likely to be? Don’t assume that property taxes are going to stay the same when you buy the investment rental property. In fact, they will probably go up. So research comparable rental properties in the area for a better idea. And don’t compare apples (owner occupied properties) with oranges (rental properties).
What will the vacancy rate be? Of course you want your rental property to stay rented all of the time. It won’t. And while the property is vacant, you won’t make money. So be sure to include a projected vacancy rate as an expense. You can examine the historical rent roles for a fairly accurate picture of what to expect. Or, as a general rule of thumb, assume that your property will have a 10% vacancy rate over the course of a year.
What will it cost to rent the property? Every time a tenant moves out, you’ll have new expenses. Things like
- Advertising
- Painting
- Cleaning
- Repairs
Don't overlook these expenses or you will overestimate the value of the investment rental property.
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What will insurance cost? Don’t forget that you will probably have two kinds of insurance:
- Property Insurance
- Liability Insurance
Get quotes. Rental insurance is more expensive than homeowners insurance. So don’t just use your personal policy as a guide.
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What will utilities cost? You’ll have to do some research to answer this question. Look at historical figures from the rent roll. Contact each of the utilities to get rates and estimated usage. And you’ll have to make some decisions:
- Which utilities will you pay?
- Which Utilities will your tenant pay?
If you are going to pay any utilities at all, you must calculate your expense in advance.
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What is the cost of property management? You’re going to manage the property yourself, you say? There’s still a cost. Economists call it the “opportunity” cost. How much money could you make doing something else instead of managing your property? That’s an opportunity cost. And it's very real
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