What to watch out for when buying a rental property
August 22, 2012
In today’s uncertain economy, home ownership is becoming tougher for many individuals. Investors are turning to the idea of owning a rental property because a greater percentage of the population is unable to secure financing for real estate and are therefore living in a unit owned by someone else.
Rental properties may be considered a rather safe way to diversify one’s income, but those interested in becoming a landlord should first consider the pros and cons.
Owning a rental property is truly a hands-on endeavor, one that has many legal strings attached. A house or condo needs constant attention and there are many ways in which money can trickle through the property and be lost forever. Before deciding to invest in a rental property, make a checklist and carefully examine the possible monetary losses.
Location and Price
The location of the rental property is the single most important factor when choosing whether to invest. Most renters look at the location with respect to where they attend school, work, or shop. Singles will not want to commute very far if they can avoid it.
Families will be checking the location of nearby schools. If there are a large number of rental properties in the neighborhood that are currently vacant, chances are the area is attracting little interest from renters.
A property will be useful as a rental unit only if the average price charged in the neighborhood compares favorably with the medium home values. It is a good idea to calculate the average value of the homes in the vicinity and compare this figure against the average annual cost to rent a home in the neighborhood. While each market varies, if the ratio is higher than 21-1, owning a home in the area is more expensive than renting.
Deciding the Rent Amount
Obviously, customers will respond more favorably to lower rent prices, but a good amount of reason must be used when setting a monthly rental cost. The total of the mortgage, property insurance, taxes and any association membership costs must be taken into consideration. The owner is responsible for all repairs including cracked walls, roof leaks, broken fixtures or appliances, and worn carpets.
Investors should look at similar properties in the neighborhood and compare rental prices among those having similar amenities. Two houses of the same size and with similar lots may have quite different rental rates because the interior of the homes are distinctly different.
Many lenders have more strict loan qualification requirements for rental properties, especially if the owner will not be living on the property. Banks and other financial institutions must consider the possibility that the unit may be vacant for a certain percentage of time, generating no income for the owner. Banks tend to be a bit more lenient when it comes to multiple-unit properties that are already occupied.
Owners living in one of these units may qualify for reduced interest rates. Owner-occupied loan packages save a good deal on interest and still allow investment income from the other units.
Check the Property Taxes
These taxes are subject to change if the property is not currently used as a rental. Cities and counties often give a tax break for properties that are owner-occupied and are also being used to generate income. If the owner does not live on the property, no tax advantages will be realized.
Jason Nelson contributed this article on behalf of Kanetix.ca