Rental properties have long been a popular way for people to make money and grow their net worth. Believe it or not, 10.6 million Americans currently earn income from rentals. However, that doesn’t mean finding the perfect property to generate income is an easy task.
Buying a rental property is a big decision, so you don’t want to do it without asking the right questions. Below are seven questions that every property owner should ask before buying property.
1. When Were the Last Replacements?
If you aren’t buying a property to fix things up, you don’t want to get caught by surprise with tons of home improvement projects. Unfortunately, not every seller will disclose property issues unless you ask. Here are a few standard things to look for that you don’t want to get caught off guard with needing a replacement:
- Water heater
- Sump pump
Of course, there are other home issues that you need to check for. If any of these are things you don’t want to deal with and just want a solid rental, make sure nothing is due for a replacement in the near future.
2. What’s the Tax Bill?
You don’t only have a mortgage to worry about when buying a rental property. Your state will want its cut every year in the form of property taxes.
Depending on where you buy a home, you may see a large tax bill every year. You need to consider this bill when determining if a property is worth buying.
Either ask the seller about the bill or look at the property records to see how much a home is valued and how much you can expect the tax bill to run. You also need to determine if the tax bill will increase when you buy because of a change of ownership.
3. Are Rentals Filled in the Area?
If you look around a neighborhood, the chances are good that many homes in the area are rentals. Unfortunately, knowing how popular an area is with rentals isn’t public knowledge. You need help from other landlords in this situation.
Reach out to your contacts in your local real estate investing scene. You want to see if anyone has any rental properties in an area you’re considering. If someone else has trouble placing people in homes in a neighborhood, the chances are good that you will too.
However, you should make sure it isn’t because of an issue with the properties in question. Look into things like crime in the area to see if those are things that can impact the vacancy rate.
4. Is the Area Under Development?
You can get away with buying a home in an established area, but you have a lower upside in this situation. The homes in these locations will rise in value, but not as much as an up-and-coming area.
You have more upside when you work in an area under development. A lot of money goes into these areas, so you can expect more people and businesses to drive up property values.
If you want to take advantage of home appreciation, this is an essential factor to consider. Check to see the population trends in the areas you’re considering and look for upcoming developments.
5. Will There Be Enough Profit?
It’s not always easy to gauge profit potential when buying first rental property. You aren’t aware of all the expenses involved, so you may break even or lose money.
You need to be completely aware of every expense you can expect and account for them in your profit calculation. Here are a few things to consider:
- Property management fees
- Legal work
There are other things to consider, but these are some of the primary ones. Compare your expected rental amount and see how much profit you’ll see. From there, you can focus on saving cash in the case of unexpected expenses.
6. Who Will Manage the Property?
Are you buying a new property for cash flow and don’t want to spend much time keeping things running? If so, you’ll need help to get all the work done.
Having a great property manager is critical for people in this situation. However, not every property manager has the same skills. Some specialize in specific types of property, so the person you use now may not work with your new purchase.
Make sure whoever you hire has the right experience for the job. If you already have a management company, make sure they have the right expertise to manage your new property. If not, you’ll need to search for another company to handle your new rental.
7. How Long Will it Take to Rent?
If you buy a fixer-upper property, you aren’t going to rent straight away. You’ll need to spend time and money to get things working well enough to rent. The problem is that you have no income during this time.
Learn how long it will take to complete any home improvement projects needed. You need to account for this in your profit calculations since you’re only spending money on a home in this situation.
A home inspection will help you determine this. You’ll learn about the big repairs needed and get estimates from contractors on how long the repairs will take.
Don’t Skip Your Due Diligence When Buying a Rental Property
You’re putting a lot of money on the line when buying an investment property. If you don’t want to waste that money and get stuck with a mortgage that’s hard to get rid of, you need to do your due diligence to find your best choice. Ask the questions above when buying a rental property to maximize your chance of a successful investment.
Head back to the blog to find more tips that will help you make successful real estate investments.