Investing in rental properties is a tried-and-tested way to earn passive income on a regular basis.
It can be risky to depend on a single income source, regardless of your age. By investing in residential or commercial real estate properties you not only supplement your main source of income but also build long-term wealth through capital appreciation.
Rental property can be an ideal investment for those who are looking to earn passive income. However, like any other investment, it too has its own risks and rewards.
So, make sure you take all the aforementioned factors into account before investing in rental properties.
In this post, we will take a look at five key factors you need to consider before investing in rental properties.
Condition of the property
If this is the first time you are investing in rental property, it might be a good idea to choose a low-cost fixer-upper which you can fix and rent out quickly.
Inspect the property carefully and make a note of all the issues that need to be fixed before you can rent it out. Calculate the cost of fixing the issues and make sure it does not exceed your overall budget.
No matter how well-maintained or affordable your rental property is, you might have a hard time finding tenants if it is located in a bad neighborhood.
Remember, you can repair, renovate, or rebuild your property any way you want, any time you want. The one constant which cannot be changed is the location.
The most important aspects of a good neighborhood include:
- Low crime rate
- Proximity to good schools and hospitals
- Access to public transport
- Proximity to recreational facilities like parks, malls, and zoos
Return on investment
A rule of thumb that you may want to abide by when it comes to investing in rental properties is the 1% rule. According to this rule, the monthly rental income from the property must be equal to or greater than 1% of its overall value.
For instance, if the property is worth $150,000, it should bring in at least $1,500 in rental income.
However, if the property in question happens to be in a rapidly-improving neighborhood, you should consider investing in it even if it does not meet the 1% rule.
This makes sense if you expect its rental value as well as the overall value to increase considerably in the foreseeable future.
Property taxes and insurance costs
Think twice before investing in a rental property which is located in an area with a high property tax rate. The taxes you pay can cut into your profits to a salient extent.
The insurance costs associated with your property could be substantially higher if it is located in a high-crime neighborhood or if the area is vulnerable to earthquakes, floods, hurricanes, tornadoes, and other such natural disasters.
This is something you need to keep in mind while choosing a rental property to invest in.
Managing the property
Managing your rental property is not an easy task. From collecting rent to dealing with repair and maintenance issues, you have to take on a wide range of responsibilities.
If you find it overwhelming you can hire a property management company that can take care of these things for you. Their fee, however, can be anywhere from 10% to 20% of the monthly rent, which can cut into your profits.