So you are considering buying rental property. You are now among the millions of people each year who consider buying investment real estate. Owning rental property can be very rewarding financially.
Becoming a successful rental property owner requires some work on your part. While it is possible to sit back and collect income year after year without doing any other work on your property, it is not a very realistic expectation if you want to maintain a profitable investment for years to come.
Before you go out and purchase a rental property do some research so you understand what to expect before you jump in and buy an income property. Your job is to rent out your property, keep your tenants happy and maintain your property so it can be easily rented out. This means you must fill your vacancies, respond to your tenants needs, and take the time to make repairs that will last and even increase your property’s value. Take some time to read articles on renting and becoming a landlord before you move ahead and buy a rental property. Investment real estate can be a worthwhile investment if you are well prepared to face any challenges that may come along.
Investing in income property is riskier than buying a second home, because rather than having a vacation home to go to relax and enjoy the weekend, an income property is purchased to generate income. A duplex may sound easy to rent and maintain. But if one unit is empty, 50% of your rental income isn't coming in that month. Rental income is usually aimed at paying off a mortgage used to purchase the income property. Valuing an income property is more complex than valuing a residence. When you buy a residence, you are calculating your ability to pay a mortgage out of your own earnings. When you buy an income property, you're calculating how the income will help pay the mortgage.
Deciding where to buy a rental property, there are several things you should consider. The supply of potential tenants, the average rents you can collect, and the ability of tenants in that area to pay are all important factors that you should research before your purchase. There are many advantages in purchasing income property in college communities, like Tempe, Arizona. There is always a need for rental units and an endless supply of renters each year. Rental income tends to be higher in college communities versus other areas and vaccines are limited. When deciding whether to buy a single family home or multiple units, remember that units tend to be far easier to rent out. Look for a property that can be sold quickly. Look for properties with features that will attract renters such as an apartment with a garage or private laundry facilities. If the property you are interested in purchasing is currently being rented, ask about its tenant’s rental history.
An income property has an annual net operating income. This is a figure of rental income less anticipated vacancies, maintenance and other expenses. Most investors divide the net operation income by something called the "cap rate"to come up with the proper value for one apartment in a complex. The cap rate relates to the expected annual rate of return on the property, and most income property buyers recommend using a cap rate of 10% when evaluating a property. This kind of simple calculation isn't perfect, but in a real-estate market that is increasingly frantic, doing even simple math can help you understand if you're overpaying for a property. Like investing in stocks, investing in real estate works best when you don't overpay.
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