Rental Property

5 Things To Know When Buying A Rental Property

5 Things 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.
 


Location

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, milennials – 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.

 

Property Taxes

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.

 

 


Maintenance Expenses

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.

 

Property Management

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.


 

Additional Resources

How To Pick A Neighborhood You'll Love

 

Should I Sell My House Or Rent My House

Should I Sell My House Or Rent My House

This is a question that I have been asked this year more than any other year during my time in real estate. My answer is always it depends on your personal situation.

 

If you are thinking about moving to a new home whether it’s in the same area or relocating all together you’ve probably thought … should I sell my house or rent my house?

 

As with many decisions, there are pros and cons to selling or renting your home. Deciding which option is best for you comes with considering several factors.

 

Should I Sell My House Or Rent My House? 

Selling My Home: Factors To Consider

Your Home Is Not Your Responsibility After The Sale

If you sell your home you walk away after the sale, no future responsibility to the property whatsoever. Plain and simple every single responsibility that comes with renting your home is avoided altogether if you sell.

 

Selling itself takes work and commitment, even with the best agent guiding you but, it’s temporary and once your home is sold you move on with your life.

 

If you are moving to another state selling is often the best choice. It’s stressful managing a rental property in general and when you factor in being in another state it only complicates matters. Owning two homes means double the responsibility.

 

No Tenants

As with most things in life not all tenants are created equal. They’re strangers living in your home and unfortunately, sometimes that means damage occurs. The extent of damage is an unknown. It could be nothing outside of normal wear and tear or it could be a destroyed house.

 

There’s stress that comes with owning a rental property and the unknown of what and when repairs and maintenance will be needed. If you sell then you will have no tenants or damage to worry about. You will receive your proceeds at closing and the new owner will be responsible for what happens to the house.

 

Remember that if you decide to rent your home and then sell later you will likely be selling it with tenants occupying it unless you can afford to pay the mortgage and keep it vacant. Selling a home with tenants living in it is a challenge at best and a nightmare at worst. They can be very difficult when it comes to preparing your home for sale and allowing showings which often results in lost profits for you.

 

You’ll Have The Equity From Your Home

This is often the biggest factor that causes people to decide to sell. Selling your home will give you the equity that comes with it.

 

That could mean the down payment you need for your new home, having a higher down payment than you’d have if you didn’t sell or have an influx of cash in general.

 

Renting My Home: Factors To Consider

Do You Want To Be A Landlord

Being a landlord is a big responsibility. It’s far more than collecting a check each month. 

 

Being a landlord comes with unknowns because you don’t have much if any control over what tenants do while they occupy your home. Some will be wonderful, pay on time, and treat your home well. Others won’t pay on time and will destroy your property.

 

If you’re comfortable with knowing you’ll need to answer tenant calls, respond to maintenance requests, track down rental payments and handle getting the home ready to turnover in between tenants then being a landlord might work very well for you.

 

You could also consider hiring a property manager to take some of the day to day responsibility off of you. They typically charge in the 10% range of your monthly rental income.

 

Is Your Move Temporary

If you know you’re going to return to the area your home is in renting may be the best option. Selling and buying homes comes with costs and financially it may be best to rent your home out knowing you’ll be returning.

 

You can always decide to sell down the road if your plans change. Understanding that whether you return or end up selling there will be items to repair or update is important to factor in as part of your decision.

 

Will Renting Be Profitable

Not every property is going to generate positive cash flow and analyzing your home to understand if it will is a big factor to consider.

 

To determine if renting your home will be profitable you need to consider all the expenses and deduct them from the income you’ll receive from renting.

 

Mortgage, insurance, taxes, and HOA or condo fees are just the basics.

 

You'll also want to consider maintenance and repairs. Vacancies are frequently an overlooked expense. It is highly unlikely and not realistic to expect to have your property rented at all times.

 

If you’re going to hire a real estate agent to rent the property or a management company to oversee it both of these come with commissions and fees that you’ll want to plan for. If you plan to rent the property yourself be sure to budget for advertising costs.

 

While you can get an estimated budget for expenses it’s not an exact science. Be conservative when running your numbers. It’s often very helpful to consult with a local real estate agent to find out what your property can rent for in the current market as well.

 

Long term you’ll want to keep in mind rental prices go up and down. Just as the market changes for home sale prices it does for rentals as well.

 

Market Conditions

Speaking of rent fluctuating this brings us to market conditions. Many housing markets have seen increases in recent years and are on track to continue to appreciate. While there’s no guarantee your home will go up in value there are indicators to review to guide your decision.

 

If your home is in a market that is likely to increase over the next couple of years you could hold onto it by renting it out and selling for a higher price down the road.


Condition Of Your Home

Buyers are picky and in today’s market, the vast majority are looking for a turnkey property. Does your home need improvements or updating? If you don’t have the money to do them right now renting could be a good option.

 

Tenants differ from buyers in that they are willing to accept homes that are less updated. Renting your home could allow you to save up for future improvements before selling at a different time.

 

Tax Consequences

This is one that I often see overlooked. If and when your home produces cash flow from renting there are tax consequences to factor in. At that point, your home is an income-producing asset and you will be taxed on the income you make from your rental.

 

You can write off the costs associated with renting your home and in turn that will lower the income in which you’ll be taxed on but, it’s still something to consider.

 

Always best to consult with your accountant on taxes. They will be able to consult with you on what can and can’t be written off and how a rental property will impact you.

 

Closing Thoughts

Careful thought and consideration should be put into your decision to sell or rent your home. It’s not something that should be decided overnight. The right choice depends on what your personal circumstances are. Weigh the pros and cons by considering the factors above and then determine what’s best for you.

 

Additional Resources

Buying A Home vs. Renting

Non-Owner Occupied Investment Properties via Luke Skar of Madison Mortgage