What to Know Before Buying a Rental Property

What to Know Before Buying a Rental Property

Table of contents

    Published 20/08/2020 14:08 EST

    Real estate has historically been considered a sound long-term investment option. And with rental properties currently scarce and rents rising, investing in real estate may be a great option for you, especially if you cater to the right demographic in a prime location. 

    Do your research and consider up-and-coming neighbourhoods with direct access to larger, urban centers where property taxes may be lower (good for you), close to schools, with access to public transit, and plenty of amenities such as parks, shopping, and restaurants (good for your renters). 

     

    👆 Tip

    Consider up-and-coming neighbourhoods with direct access to larger, urban centres where property taxes may be lower

    Also keep in mind what the house itself has to offer such as the number of bedrooms, finished basement, large backyard, etc, which may cost you more in the long run, but will appeal to a larger group of potential renters. 

    At the end of the day, the decision rests with you. Are you ready to face possible challenges in order to build ongoing wealth through real estate? If you do your research and rely on expert advice before making decisions, the risks quickly begin to diminish.

     

    Key Takeaways
    • With rental properties currently scarce and rents rising, investing in real estate may be a great option for you, especially if you cater to the right demographic in a prime location
    • Your rental property must generate a solid income over time or it’s not worth your investment
    • It’s important to know your ongoing costs before purchasing a rental property

    Will your rental property generate income?

    Ideally, your rental property will generate income. At the very least, it must cover your monthly expenses – including mortgage, insurance, taxes and utilities – plus required maintenance. You have to know that, over time, it’s going to generate a solid income for you or it’s not worth the investment.

     

    👆 Tip

    A 1% guideline frequently referenced by real estate investors when evaluating potential property purchases states that the monthly rent should be at least 1% of the total purchase price of an investment property

    There’s a 1% guideline frequently referenced by real estate investors when evaluating potential property purchases. This rule of thumb states that the monthly rent should be at least 1% of the total purchase price of an investment property

     

    🤓 Example

    Purchase price = $400,000. Average rent in area = $2,000/month. Gross income (before expenses) = $24,000 ($2,000 x 12 = $24,000). Property offers gross annual income of 6% on purchase price ($24,000/$400,000)

    Of course, income generation requirements vary depending on your specific real estate investment goals. Some people aim for a higher positive cashflow property right away, while others understand that the property will rise in value over time while the mortgage amount decreases, which will help build equity faster. Your decision, therefore, must be based on your personal risk tolerance, taking into consideration such things as area vacancy rates.

    Consider expenses of owning a rental property

    Much like when considering an ideal home you’d buy for your family to live in and enjoy, your rental property also requires a great deal of research. 

    It’s important to remember that all the expenses you have for your primary home will also be duplicated in your rental property – including mortgage, insurance, taxes, utilities, maintenance and so on. Also, if your rental property isn’t located in the vicinity where you live, you’ll want to consider hiring a local property manager, so keep this in mind when you’re factoring in your costs.

     

    Important

    Landlords pay reduced taxes thanks to certain property expenses being deducted from your rental income

    You also pay reduced taxes as a landlord thanks to certain property expenses such as property taxes, insurance, management fees, maintenance costs and utility bills (when included in the rent), interest and bank charges, and advertising costs being deducted from your rental income.

    Calculate returns from buying a rental property

    There are many considerations to make when selecting a rental property that’s right for you. This includes deciding if you’re going to purchase more properties after buying your first rental property. If so, how you set up the mortgage on each property becomes extra important. At nesto, we can help guide you while purchasing a single property or building an entire portfolio of investment properties.

    Calculating your return involves looking at all expenses for your rental property as well your purchase price and monthly income. See above: Will your rental property generate income?

     

    What are the benefits vs risks of buying a rental property?

    As with any major purchase, it’s important to weigh the benefits and risks involved in order to see if it fits into your current lifestyle. 

    Here are some top benefits and risks to consider:

    Benefits

    • Predictable monthly income
    • Income increases from property value growth 
    • Pay fewer taxes 
    • Easy access to professional guidance

    Risks

    • Mortgage financing 
    • Monthly property costs
    • Maintenance 
    • Property management

    See: What You Should Know Before Buying an Investment Property

     

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