What To Know When Buying A Rental Property
If you’re a homeowner who also wants to become a landlord there’s a lot to consider. Surprises when buying a rental property are never welcome and can often be avoided. Before you become an investor check out 5 things you need to know when buying a rental property.
The rental market in Northern Virginia is extremely strong and prices have been rising for over 10 years. Demand for rentals is high and millennials make up a large amount of the demand. They are often opting to rent well into their 20’s due to the high real estate prices in this area combined with student debt and older child-rearing years.
High demand in a desirable market like Northern Virginia creates an excellent opportunity to purchase an investment property.
Here’s what you should know when buying a rental property.
Let’s say it again … location, location, location. It really is THAT important. Selecting a market with low vacancy rates and high demand should be at the top of your list when buying a rental property. It’s the simple law of supply and demand. The higher the demand and the lower supply the better. A highly sought after location will be a costly investment but, it will also mean a higher return both in the form of monthly rent and in property appreciation. As the value of your property rises you’ll be passively making money on top of the rent you’re collecting.
Location Part II – Walkability
When buying a rental property location isn’t just the big picture of what city to buy in. It’s also what neighborhood to buy in. Proximity to shopping, dining, entertainment, and the ever sought after public transportation should all play a role in your decision-making process. Walkability is directly attributed to a higher home value. Walkability is also a key factor to millennials looking for their next home.
The ability to walk inside a particular area is also significant from a natural viewpoint. According to the Urban Land Institute, when work, home, shopping, cafés and travel are within a quarter-mile to half-mile of their homes, most buyers prefer to walk rather than drive. As a result, there is less air contamination.
The walkability of a property also allows you to spend less time and money driving to shopping, feasting, diversion, stimulation and even work destinations, particularly because you have the choice of walking to any place you need to go. This also means cost-effectiveness – even when homes in a walkable area are a little too expensive, the lower transportation expenses implies that the total average cost of living is about the same as living in a lower-valued area because of the longer drives and higher transportation costs.
The idea of walkability is also good with modern trends in our society. Based on studies, miles driven per individual has been dropping since the mid-2000s, and the baby boomer generation is already beginning to phase out of their peak driving years. Moreover, millennials – who are entering or in their peak driving years – are driving around 33% less than baby boomers did at their age. With less enthusiasm for owning and driving vehicles, it is so easy to see why individuals who are looking for rental properties today prefer walkability.
Where you buy your rental property will determine what the property taxes are. This all goes back to location too. Property taxes can vary drastically by location and this is another important factor to consider when buying a rental property.
For example, in Fairfax County homeowners pay $1.15 per $100 of assessed value compared to Arlington County where homeowners pay $1.013 per $100 of assessed value.
When buying a rental property you’ll want to ensure the monthly rent is high enough to factor in what you’ll owe on property taxes.
You need to ensure your rental property is in a location that provides a high enough monthly rent to make up for what you’ll pay in property taxes.
When you own a rental property you still have the responsibility of maintaining the property as if you were living there. Ongoing maintenance is inevitable and it could be as small as a leaky faucet to as large as replacing the HVAC. When buying a rental property pay close attention during the home inspection. This is a prime opportunity to learn about the property and understand if there are large items that are nearing the end of their useful life that will require budgeting for a replacement in the near future.
Depending on what type of rental property you buy your maintenance costs will vary. For example, if you purchase a single-family home you will be responsible for the roof and siding. If you purchase a condo it’s not likely you will have that responsibility but, you will have a condo fee to pay each month. There are pros and cons to both.
Ownership of a rental property is a long-term investment and budgeting is going to be required each month regardless of what type of property you buy. Doing so will prepare you for expenses throughout the time you own the property.
Will you need property management when you buy your rental property? Depending on where you’re located and where your rental property is located this might be something to consider. Your schedule and daily demands should also factor into this decision. If you live in a different state than where your rental property is located it may even be a requirement to have property management. Property management is another expense to consider when factoring your return on investment.
Before you choose between self-managing your property and hiring a property manager, you need to understand what goes into managing rental properties.
If you are a novice investor, you may see a rental property as a simple equation of: rental income – (mortgage + expenses) = profit.
While this formula is the most basic formula for any investor, you also have to include your landlord duties and energy into that equation. As an investor, you may opt to hire a property management company to handle these duties or self-manage your rental properties. If you are cutting down on your expenses, you may opt to self-manage. There are a lot of investors who have found success in self-managing their rental properties as a way to cut down on their management expenses.
To determine which option is best for your portfolio, consider all the landlord duties you will be taking on if you self-manage or that you could pay a property manager to handle. These duties may include a monetary expense and always include the time required of you or your manager.
Are you ready to buy a rental property?
These certainly aren’t the only things to know when buying a rental property but, all of them should be at the top of the list of things to consider. Buying a rental property can be a very wise investment but, as with any other investment you have to do it correctly. Not every property is the right rental property investment. Enlisting the expertise of a trusted real estate agent who has experience working with investors is always wise. Do your homework and make sure you’re selecting the right property, doing so will set you up to earn a passive income for years to come.