Investing in rental real estate can take many different forms and yield a wide range of profits and losses. Some investors purchase large apartment buildings or commercial properties which they rent to numerous tenants, while other investors purchase single homes to rent to individuals or families. Rental real estate can often produce long terms profits, because property will usually increase in value, even while it is being rented. Rental real estate can also subject the land owner to a great deal of liability as well. The property must be adequately maintained during the rental period, and this can sometimes lead to short terms losses for the investor. The property might also be vacant for an extended period of time, often leaving the investor to pay the mortgage on the property entirely from personal funds. Tenants might also become delinquent in paying rent, forcing the landlord to pursue eviction procedures, which often multiplies the time and expense required to manage the rental investment. The investor can often minimize liability and maximize profits received from the rental property by carefully considering several factors prior to the purchase of the property.
The first consideration the investor should contemplate is the total cost of the investment and the expected return of the investment. The investor should consider several factors in calculating the total cost of the property. The down payment for the property will typically be the most costly component. Most banks require a down payment of 10% when purchasing an investment home or commercial property. The closing costs for the purchase should also be factored into the total cost of the property. The investor should also consider estimates for property repair and upkeep when evaluating the total cost. This will probably average between $50 and $100 per month for a single family home, depending on the condition of the home at the time of purchase. If the property will need immediate repairs to become rentable, these costs should also be considered. Once all of the initial costs of the investment have been calculated and estimated, the prospective purchaser should consider the monthly mortgage payments for the property. The total of these numbers gives the investor an estimate of his out of pocket expense in purchasing the property, and his monthly liability for the property. For example, an investor might consider purchasing a house for $40,000. The closing costs are $1,500 and the house needs $2,000 in repair and improvement to become a suitable rental property. The traditional investor will therefore need to have $7,500 available to purchase and repair the property.
The investor must next consider the difference in the monthly rental value of the home and the monthly liability for the home to determine if the investment will generate monthly revenue. If the mortgage for the property, including taxes and property insurance, is $250 and the expected monthly repair expense is $50, the investor can then assume that the property will have to rent for at least $300 per month for his investment to break even. The exact monthly rental price cannot be calculated, but the investor can develop a target price for which to rent the property. If the investor wants the rental property to generate a minimum of $100 per month, he knows that he will have to rent the previously mentioned property for at least $400 per month. The prospective purchaser can easily determine if this is a feasible rental amount for the property by studying other comparable homes being rented in the same area.
The rental real estate investor must also consider the mortgage on the property in light of his personal financial situation. The investor will usually be required to pay a large amount up front to purchase the property, and he then becomes liable for the mortgage on the property. The mortgage is not an issue if the property rents easily, but the investor should determine his ability to pay the mortgage in the event that the property does not rent for several months. If the mortgage for the property is $250, the investor may wish to have $1000 to $2000 reserved to make the payments if the property does not rent for several months.
There are several other considerations regarding the management of rental property. The two primary concerns are extended vacancy and nonpayment of rent by property occupants. If the property is vacant for an extended period of time, the rental price is probably too high. The owner should probably attempt to lower the rental price or offer incentives if the property remains vacant for an extended period of time. This might often cut into the owner’s desired return on the property, but some rent is often better than no rent. The prospective purchaser can reduce the likelihood that the property will remain vacant for an extended period of time by determining rental amounts for similar properties in the area before purchasing the investment property. This can be achieved by reviewing newspaper ads or speaking to local tenants and landlords.
The rental property owner might also be faced with tenants who become delinquent in rent payments. The landowner is forced to attempt to remove the tenants from the property. Laws in most states prevent the landlord from forcibly evicting the tenant from the property. The property owner therefore cannot move the tenant out himself. The owner must go through the legal eviction process to remove delinquent tenants. The best method of reducing the time and expense of eviction is prevention. The rental owner can greatly reduce the likelihood of non-paying tenants by taking several steps before the tenant moves into the property. The tenant should be qualified before he is allowed to move into the property. Prospective purchasers should make a list of tenant qualifications prior to purchasing a rental property. These qualifications might include items such as satisfactory credit reports, criminal history checks, and verification of employment. The more stringent the standards for tenant qualification, the more protection the landlord will receive. However, stringent qualification standards reduce the number of potential tenants for the rental property, and increase the likelihood that the property will remain vacant for an extended period of time.
Rental properties can provide an excellent source of income and appreciation for an investor. The investor also assumes a substantial amount of liability in purchasing and renting properties. The best method of minimizing the risks and maximizing the profits associated with purchasing investment real estate is by diligently researching the variables associated with the property in light of the investor’s personal financial situation. This will allow the investor to consider and plan for the risks associated with the purchase and determine if the investment is worth the associated risk.
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