10 Things to Consider When Buying a Rental Property
By Michelle Clardie on 12/11/2022.
Reviewed by Dan Gatsby.
Buying an investment property is one of the soundest financial investments you can make! Investing in rental property provides monthly cash flow, impressive tax benefits, and long-term appreciation. It can even be a path to creating generational wealth.
But there are many things to consider when buying a rental property. And if you’re new to rental property investing, you might not know what you should be factoring into your investment decision.
As experienced real estate investors, the team at Gatsby Investment is full of tips for buying rental property and making the most of your real estate investments. We can show you how to spot a good real estate investment. And we can help you understand which things to consider when buying rental property.
In this article, we’re going to focus on 10 critical considerations for your rental property investment:
The first thing to consider when buying a rental property is what you want the property to achieve. If you are most interested in maximizing your nightly rates, for example, you may want to consider short-term vacation rentals (as allowed by local laws). But if you are looking for a low-maintenance property that you can manage without a property management company, the stability of a long-term rental unit would probably serve you better.
Your goal for the property will also guide you in choosing a suitable property in terms of size, price point, and location.
2. Population Growth and Job Market
As a general rule, you want to invest in a growing area with strong employment opportunities. Population growth is a sign that your local market is in demand. And solid job prospects attract people, creating a virtuous cycle of sustainable growth.
3. Local Demand for Rentals
What percentage of local residents are renting instead of buying? Investing in a market where renters outnumber homeowners is often a good idea because you know that rentals are in higher demand than homes for sale.
As a rental property owner, you want to see regular increases in both rental rates and property values. Rental income increases mean greater cash flow, and appreciation in value means an increase in your net worth. Focus on long-term trends rather than short-term volatility to determine how your local market is performing.
5. Location, Location, Location
Location will always be one of the most important factors to consider when investing in real estate. The ideal location for a rental property is
Easily accessible from main roadways or public transportation,
Close to amenities like grocery stores, shops, and restaurants,
Within a reasonable commute time to major employers, and
In a good school district.
6. Renter Demographics
Who will your future renters be? And what will they be looking for in a rental? Knowing your target market helps you tailor your property to meet their needs, which allows you to generate greater demand and command higher monthly rents. Consider a few potential niches and what they may want from an apartment or rental home:
Young adults may be co-living and want enough bedrooms and bathrooms to accommodate 4-5 roommates.
Growing families who can’t afford to buy may need three or more bedrooms and may want a private primary suite.
Business professionals may value amenities like fast internet and strong soundproofing for taking Zoom calls.
7. Financials
Calculating your projected income and expenses will help you determine if a property is the right investment for you. There are multiple things for real estate investors to consider when it comes to financials.
First, you need to decide if you’re going to pay cash for the property or if you need financing to fund the purchase. Financing some of the purchase price will mean higher carrying costs because of the monthly mortgage expense. But it will also mean a lower upfront investment.
Your upfront expenses will also include closing costs for the purchase plus any renovation costs incurred to make the property market-ready.
In addition to any mortgage payment, you’ll need to account for operating expenses like property taxes, insurance, and maintenance. It’s good practice to set aside some cash every month in a reserve fund to handle unexpected expenses (like a water heater that needs to be replaced, for example).
You’ll also want to consider whether you’ll hire a property management company to find renters, manage security deposits, collect monthly rent, and handle maintenance issues on your behalf. And you’ll need to factor in vacancy loss from periods between renters when a unit isn’t producing any income.
As you review your financials, you need to confirm the affordability of your proposed property, and then estimate the potential returns on your investment. The one percent rule is a quick ROI test that works well in markets with low property values. If your market has comparatively high property values, checking the cap rate might be a more relevant metric.
8. Tax Benefits
Many new investors overlook the tax benefits of real estate investing. But these benefits can make a significant difference to your bottom line, so they’re worth looking into.
One of the most impactful tax benefits is rental property depreciation. Investing in rental property allows you to claim a deduction on your income taxes for the assumed wear and tear on your property. This deduction alone can potentially save you thousands of dollars in annual income tax.
9. Existing Rental Agreements
If your chosen property is currently being used as a rental property, there may already be residents in place under active rental agreements. This can be a good thing because it means immediate rental income for the new buyer. But it also means being legally bound by the terms of rental agreements that you did not draft.
If your chosen property is currently renter-occupied, take the time to review the lease agreements in place and make a plan to renew those contracts under new terms when they expire.
10. Property Condition
Before you close on your new rental property, have a licensed property inspector evaluate the condition of the property. You’ll need to know if the property is up to code, if there are permits on file for recent renovations, and if there are any potential defects that you need to be aware of.
Getting a professional opinion on the condition of the property can help you feel confident in your investment decision. And, if there are items on the inspection report that need to be addressed, you might be able to negotiate a lower purchase price or concessions to cover the cost of any repairs needed.
Invest in Rental Properties with Gatsby Investment
With so many different things to consider when buying a rental property, many real estate investors are choosing to leverage the experience and knowledge of reputable real estate syndicators, rather than investing alone. Real estate syndicators, like Gatsby Investment, pool funds from multiple investors to finance real estate projects. The syndicator professionally manages every aspect of your rental property, from choosing properties with the greatest return potential to supervising renovations and dispersing funds back to investors.
