Should I Buy An Investment Property To Rent Out?
In today’s economy, the question as to whether a rental investment property is a sound decision is an important one. Property investments can provide both long and short term financial securities, as well as revenue return, and as demonstrated through the popular presence of house flipping shows on television, and how-to earn income from renting advertisements on radio, many would-be investors are interested.
In support of such an investment, SmartMax believes one must review a few important factors pertaining to investment properties to ensure a right fit for one’s financial position and overall goals. After all, there is risk in investment, and understanding the details of the processes, advantages, and disadvantages can help one lower such risk and get the most for their investment.
Addressing Rate-of-Return (ROR) for an Investment Rental Property
Prior to making the decision to purchase an investment property, one must calculate the expected rate-of-return (ROR) and evaluate the amount of time one is willing to put into maintaining the property and managing tenants. ROR is calculated by adding up all monthly expenses (i.e. mortgage, property taxes, insurance, HOA, estimated cost of repairs, cost of property management, etc.) and dividing by expected monthly rental income. A conservative approach to estimating monthly income is to take the market rental rate and multiply it by 75%. This allows you to factor in a vacancy period in which you will be marketing the property and/or completing repairs. This simple ROR calculation is vital to determining whether purchasing an investment property makes sense. After all, no one wants to purchase an investment property that is not profitable.
Additional factors that can impact an investment properties ROR include choosing the right property management company, placing accurate and well placed property adds, choosing the right rental pricing, maintaining local government compliance, maintaining the property, management of emergency situations, and performing timely evictions. As an example, if a rental property should be listed at $2,000/month, but is listed at $2,500/month, this could cause the property to sit on the market for longer than expected and increase the amount of time the property is vacant. Increased vacancy time causes a decreased ROR.
Level of Commitment
One must also question how much of their own commitment they are willing to put into their investment property, as even one with little value can require a significant amount of time, money, and effort. Investors not only deal with rent collection, they must also deal with city/county/locality rental registration, lead tests (if applicable), making sure the tenants maintain rental insurance, determining the market rent, marketing the property, tenant screening (background checks, credit history, tenant history), maintaining the property, management of emergency situations and evictions, etc.
SmartMax believes that a would-be investor would be wise to consider using an experienced and established rental management company to assist with such efforts. With an experienced team of real estate agents and professionals, investors can receive significant support for their management needs.
Understanding the Differences of a Rental Property Investment and Buying a Residential Home
Rental investment properties, and the loans to secure them, do not follow the same conventions as when securing a personal home. They may not be listed through traditional outlets and can be harder to come by. Generally, they can also need more care and renovation than properties lived in by their owners. These properties, without the security of a definite tenant, also trigger financial institutions to view them at a higher risk, in turn requiring more of an initial upfront down payment on the investment. These properties may also not have the same ideal tax benefits of a traditional financed home: certain expenses and deductions are allowed by the IRS, but can be minimal at the onset. SmartMax encourages their investors to consult with a trusted tax advisor in order to fully understand the implications of owning an investment property prior to making the important decision to purchase.
SmartMax believes an investment rental property is an excellent way to jump start what can be a path to a stable financial asset. Although there is risk, such an investment property is capable of a substantial return, if approached with an understanding of the proceeding factors discussed, and managed properly with available assistance such as SmartMax’s property management services.