Investing in rental property is a huge commitment. Work doesn’t just begin until after you have purchased the rental! There is a range of things you need to give thought and plan before you even get to the buying phase. So, to prepare you for buying a rental property we have compiled 5 of the most useful tips!
1. Game Plan
When you begin planning to invest in rental property, identify what you want from investing in rental property and who you will target. Do you want families? Long-term or short-term stays? Students only? Etc. We have a whole article dedicated to helping you identify your rental properties prime target market in 2018. Remember, the sooner you identify your target market, the sooner you can cater to them.
2. Research each industry.
There are a few variations of rental properties. For example; apartments, vacation rental, multifamily property, a stand-alone house, etc. Each industry caters to a different demographic. Being evident that each industry can directly relate to appeal to a different demographic.
A multifamily property is a complex or building where multiple separate housing units for residential inhabitants are contained within one building or several buildings within one complex. A well known multifamily example is an apartment building.
Types of multifamily homes:
Duplex: Two homes in one freestanding structure
Townhouse: Any number of homes attached at the sides with separate entrances
Condominium (condo): A private residence in a building or community with multiple units
Apartment building: multiple different houses in one structure. Unlike the above dwellings, apartment building units are often rented by tenants rather than owned.
If you’re starting out this might not be the best fit for investing in rental property. Multifamily housing demand’s an extreme amount of attention and hands to operate smoothly, which obviously provides you with a lot more upfront costs and stress when starting out.
Owning a multifamily investment means that you have multiple streams of income, which in turn protects you against losses – It’s highly unlikely that various tenants will end their lease at once, meaning you will always have a secure cash flow.
Verdict: If you are willing to invest the time, effort, energy and extra funds into a multifamily property you can reap severe benefits once the ship is steady and everything has been implemented.
Single Family Homes –
A single-family home is a property built to accommodate one family and, by definition is not connected to or sharing walls with any other properties.
Single-family homes have been the go-to for first-time investors who are seeking the best return on investment when getting into property management and investment. The risks are far lower than commercial or attached property.
Verdict: If you are planning to target families or vacation groups and can secure a property in a prime location close to attractions, schools and transport options a single house property may be the most logical decision to begin investing in rental property.
Commercial Property –
Commercial property is any non-residential building that is intended to generate a profit. E.g., stores, malls, office buildings.
Commercial property offers investors and property managers a Ludacris return on investment (ROI). This is because once the appropriate business moves into the property, they (for the most part) maintain themselves.
Residential leases last anywhere from three to 12 months on average. Commercial leases, in comparison average between 2 and eight years. Given the nature of the property tenants typically hold on to the contract for longer.
This takes away some risk involved when purchasing commercial property. However, commercial property is very sensitive to economic conditions. This means that in any situation where there is an economy fall, the interest in business premises falls significantly.
Verdict: If you are looking at adding diversity to your portfolio commercial property could provide you with the cash flow injection you need. Investing in a prime location property could do wonders for your revenue stream. Just be sure to conduct thorough due diligence when you are deciding to invest.
Due diligence is an investigation of a subject. This is usually performed before signing a contract. In this case, its checking property before purchasing it. Snap Inspect offers Due diligence checks as one of our features, with added business intelligence that can calculate hidden backend costs that come with the property. Click here to find out more.
3. Calculate your projected income. (account for every cost)
The right rental property will always be able to produce income, but remember that there will still be hidden, unexpected costs that pop out. If you see your rental property as purely a money-making investment, compare the potential rental income against the price of the property and the cost involved in setting things up and then maintaining elements. However, if you are looking at an investment that you can also use from time to time as a vacation rental or live in when short-term tenants move out, personal choice will play a much more prominent role in the selection process.
Depending on where you purchase your property you could be paying up to three different types of taxes. The two primary types of taxes you must factor for are property and occupancy taxes. You must also account for short-term lease tax that you will be required to pay based on what you earned.
Getting Insurance is a must if you plan to be sustainable when investing in rental property. Insurance protects your invest against your tenants. No matter how long term or short term your tenants stay, it’s crucial to protect yourself and get insurance.