Are you thinking about investing in your first rental property? It’s a big step. But with careful research and some time and effort, it can be a great way to generate a passive income.
Buying a house is a top goal for most people. However, it’s not as easy as buying groceries in the supermarket—it’s one of the biggest financial decisions a person can make. Unless you have a lot of money in your bank account, you need to think long and hard before entering into this kind of financial commitment. Here are some things you need to consider before you purchase a house.
Consider Your Finances
If you’re new to real estate investing, you could be tempted to pick an investment property based on your feelings. That is a classic pitfall, and you do not want to fall into it. Remember that you will not be living in this apartment. Therefore your own preferences are irrelevant; it’s the numbers that are important.
Make a financial plan before you buy, and remember that you’ll cover more than just the mortgage. You must also consider running expenditures, property taxes, and the typical vacancy rate.
When crunching the statistics, bear in mind that just because rent prices are higher in one place doesn’t imply you’ll have positive cash flow at the end of the day. Take the time to analyze the true payout vs your initial investment. Often, median-priced investments with fair rent outperform high-profile rentals in terms of long-term profits.
Check The Market
Depending on current economic situations and other factors, the real estate market can move either to the seller’s or buyer’s favor. A buyer’s market means that there are more houses for sale than buyers. A seller’s market, on the other hand, occurs when fewer homes are on the market than buyers.
These market conditions can determine how much room you have when making an offer. Talk to a real estate agent who can help you understand the real estate market in your area and how it’s currently affecting buyers.
Think About The Location
Because “location, location, location” is so crucial, everyone is always talking about it. A good location is essential for achieving a good return on your investment. It impacts the amount of rent you receive, the caliber of your tenants, and the vacancy rate you are likely to encounter.
When it comes to hold-and-rent properties, a community with plenty of amenities is your best chance. Good schools, a flourishing job market, public transit, parks, restaurants, retail areas, post offices, medical facilities, and entertainment options are just a few of the features that will entice prospective renters to rent your property.
The safety of the area also contributes to the location’s desirability. Before you buy a home, do some research on crime patterns. Begin by calling the local law enforcement department to learn about vandalism and other minor and major crimes in the region. You should also consider whether those figures are rising or falling in order to get a sense of the long-term situation.
Easy to Maintain
Some investment properties, such as holiday rentals and student rentals, need more time to manage than others. Properties in low-quality regions that are in poor condition and require frequent maintenance calls have greater turnover rates and will necessitate more effort on your side.
The homes that require the least amount of upkeep are those that attract good tenant retention. These are unlikely to be the most flashy investments on the market, which is OK. You want to be powerful and consistent, not a flash in the pan.
If you’re planning to maintain the property yourself (rather than employing a property manager), location is also important when it comes to maintenance. Check that your property is close to your home base. Otherwise, driving out there—or, worse, flying there—to deal with every minor issue that arises would quickly become a major hassle.
The Ability to Appreciate
A rental property that rises in value is a wise investment. For you as an investor, appreciation occurs on two levels: when you purchase the property and when you sell it.
When buying, consider the appreciation potential of a few aesthetic changes to the property. How much more will you be able to charge for rent after the walls have been repainted compared to what it is currently worth? You can save money on your initial investment if you’re ready to put in some work after you acquire the house.
Another consideration is how much the property will be worth when you sell it in the future. All land will appreciate slightly over time, but you want an investment that will appreciate more than the others. It goes without saying that certain places are more promising than others. However, you can take it a step further.
Consider the attraction of the property’s precise location within the greater neighborhood (for example, being on a cul-de-sac increases value). You may also inquire with the city hall about plans to construct additional facilities, which will increase future property prices in the region.
How to Optimize Your Taxes & Deductions
The property tax for rental properties can be a bit more complicated. The amount you pay will depend on the property's value and the tax rate in your area. You must also factor in any special assessments or levies specific to rental properties. Some states allow you to claim a percentage of the property taxes you pay as a deduction on your income tax return. Check with your accountant or local tax authority to determine if this is an option.
Rental property tax deductions will help you make the most of your earnings, but there are many important things to know. First and foremost, you can only deduct expenses related to the rental property. This means you cannot deduct the mortgage interest on your personal residence if you also own a rental property.
To maximize your deductions, it's essential to keep good records of all of your expenses. This includes anything from advertising costs to repairs and maintenance. You can generally deduct these expenses on your income tax return. In addition, you may be able to claim a depreciation deduction for the property.
The depreciation deduction allows investors to write off a portion of the property's value each year. This deduction is especially valuable for investors who own high-value properties. Be sure to speak with your accountant or tax advisor to determine your eligibility for this deduction.
Hiring a Property Manager vs. Self Managing
Determine early whether the plan is to self-manage or hire a property management company, what price range is feasible, what rental prices are reasonable, and how much income the property may provide.
Self-managing comes with a host of pros and cons. It generally saves money, but it also requires more time from the investor to handle maintenance issues or complaints. Hiring a property manager can provide some relief, but do your research on companies in the area and reviews before signing any contracts.
We Do the Work for You
Rental property management can take a lot of time and require a lot of effort to maintain.
While doing it yourself makes sense if you’re handy, live close, and don’t mind investing a few hours every month in the job, it’s not always feasible. Consider hiring professional tenant services to manage some of your responsibilities.
Overland Management is committed to making landlord obligations simple for everyone, regardless of knowledge or experience.
If done right, buying a house can be both a good investment and a smart purchase. It is a contradicting experience of stress and excitement. As a result, it’s important that you keep in mind the above factors before closing a deal on a new house.