Many factors must be considered when choosing a rental property investment. The primary considerations are the price of the property, condition, expected rents, location, investment property taxes, and maintenance costs. Financing is another major issue, since many banks require the investor to have a high credit score and provide a 20 percent down payment on rental properties. An investment property rate may also be higher than the interest rate on residential real estate.
Price is almost always the foremost consideration for a rental property investment. It is very difficult or impossible to make money on a property that is overpriced. The price of the property should be looked at in relation to the current market rents. No universal formula exists for determining an acceptable price, although one useful starting point is to subtract the mortgage payment, taxes, insurance, and maintenance costs per month from the monthly rent. If the result is positive, the property may be worth investigating further.
Before purchasing a property, the investor should find the average rental rate in the area. This can be done by checking local newspapers and online classified sites. Management companies can also provide information about current rental rates.
The location of the rental property investment will determine the rents that can be charged. Properties in low income or high crime areas have lower rents than identical properties in areas that are in high income areas. A property with access to good schools or amenities will also usually have higher rents. Rents also tend to fluctuate with changing economic and demographic conditions. In times of high gas prices, properties near public transportation will rent for more.
Properties in poor condition will be less likely to attract good tenants. Any potential investment property will always need to be looked over by at least one professional inspector to determine the cost of any repairs that are needed. It is also best if the investor is present during the inspection, since a written report may not fully convey the state of the property. A rental property investment that needs repairs should have a lower sale price. No property should ever be purchased without a thorough inspection.
All properties need maintenance, and the investor must have access to reliable professionals that can deal with any problems. Investors with a small number of properties and the necessary skills can sometimes do the upkeep by themselves, which increases their profits. Most choose to deal with a property management company to deal with maintenance and other tasks, such as rent collection and tenant screening. Some investors with large apartment buildings trade free rent to a maintenance person in return for upkeep.