Owning a rental property can be financially rewarding.
Why do you think so many people are attracted to the world of real estate investing?
By owning a rental property, you can make a decent passive income at the end of every month. Let’s say, for example, that you rent out your property for $1,000 every month. That means when it’s fully occupied you’ll take home $12,000 per year. Also, let’s not forget that your property’s value will only increase with time.
Yes, all these projections are ideal. Yet, even partial results can translate into really good results. After all, even with a 75% occupancy rate, you’re still bringing in a whopping $9,000 per year in rental income.
Now, is owning a rental property all about dollars and cents? Of course, not!
As with any other investment type, it has its own set of challenges. It isn’t as easy as a walk in the park. There are many issues that you are bound to encounter, more so if you are just beginning in real estate investing.
That’s why in today’s article, you’ll learn some of the common problems you should look out for when buying rental properties.
Problem #1: Not buying a move-in ready home
This is a huge mistake that far too many new investors make when buying their first investment property.
Ever watched real estate reality TV? If so, chances are that you’ve seen one happy homeowner buying a troubling fixer-upper and transforming it into a dream home.
Sure, some situations end up perfectly as planned. However, for the unlucky or unexperienced, it could mean thousands of dollars down the drain.
Advisably, when starting out, insist on buying a move-in ready home.
Because a move-in ready home requires little if any construction work. As soon as you’ve made the purchase, all that remains is finding a tenant.
Also, if you are buying a newer property chances are it will be more energy efficient. And, tenants like energy efficient homes. This means that you’ll have an easier time filling your rental vacancies.
Problem #2: Not considering the ROI.
As a property investor, your goal is to make money. As such, consider how much your property will be able to earn for you once you buy it.
As a general rule of thumb, make sure your investment abides by the 1% rule. Basically, the rule states that the gross monthly rent should be at least 1% of the property’s final price.
This helps confirm that your rental income is more than your property’s expenses.
For example, with a $100,000 property, you should be able to make at least $1,000 every month. That is, $1,000/$100,000=1%.
Problem #3: Not considering rental property insurance costs and property taxes.
Rental property insurance costs, needless to say, is included in expenses.
As such, being an expense, means that it can eat into your profits. So, exercising you due diligence when buying an investment property is key.
The first step is determining the type of insurance coverage you want for your rental property. While they vary, policies will generally provide cover for your property’s structure, your property contents, and loss of rental income.
Furthermore, determine whether the area is vulnerable to natural disasters like earthquakes, hurricanes, tornadoes, sinkholes, or floods. Such areas generally tend to have higher insurance premiums.
If this is the case, it may not be worthwhile to buy there.
Just like insurance costs, property taxes can also eat into your profits.
Broadly speaking, metropolitan areas usually tend to have high property taxes, and rural areas have lower taxes.
Some locations also charge investors a higher rate than owner-occupants. Your best bet in this regard would be to hire professional help. A local tax assessor should be able to advise you accordingly in this regard.
Problem #4: Buying in the wrong location.
“Location, Location, Location” – the age-old real estate mantra – still rules and remains the most important factor for a real estate investment’s profitability.
Tenants want to live in a place they are proud of. One factor that you should pay close attention to is whether the area is safe.
Another thing to consider is the infrastructure. That is, anything that makes for a good residential location. Good examples include the property’s proximity to shopping facilities, hospitals, schools, and public transportation.
Problem #5: Going it alone.
Being a landlord is a team effort! Going it alone is a shortcut to failure.
A successful team of real estate professionals will be able to keep your business profitable while ensuring your renters have a safe and comfortable shelter.
The following are some professionals you should include in your team:
- A property manager. A qualified property manager can handle anything from property advertising to tenant screening and tenant eviction.
- A property inspector. While a professional isn’t necessary, it definitely helps. A property inspector can help you spot damages caused by tenants, and problems that need immediate attention.
- A real estate agent. Real estate agents can help provide you with invaluable information pertaining to the local rental market.
- A real estate lawyer. Yes, legal issues may not crop up often. But, when they do, it pays to have someone who can handle all the required paperwork.
Problem #6: Failing to hire a qualified property manager.
Now, this is a huge one. Remember, anyone can become a property owner, but not anyone can become a property manager.
Being a landlord isn’t all about collecting rent at the end of the month. It’s a huge responsibility that requires a number of distinct skills that you may not have experience with.
For example, one should have knowledge and experience in accounting and finances, customer service, communication, and organization and planning. Not to mention, understanding of the various rental laws regarding landlords and tenants.
Sure, real estate continues to churn out many millionaires. However, it isn’t a road to guaranteed riches. To succeed, due diligence is key.
Hopefully, this article has been insightful in this regard.