If you are looking at avenues for investment, then investing in rental property must be at the top of your list. When you invest in a rental property, you create a tangible physical asset and also gain a source of passive income. A good rental property can fetch a gross rental yield of around 5-6%.
A Forbes article quoted a study that said Australians spend an average of 2.5 hours a week focused on property. Let us explore important things you should keep in mind while investing in a rental property.
What to Consider While Investing in Rental Property
There are many things to keep in mind before investing in a property. You may or may not opt to consult a property investment specialistbut in either case, it is best to do your own research and arm yourself with as much relevant information as you can. Here are a few pointers to start you off on the path.
Consider the Finances
Entry and exit costs in this sector may be high. Take stock of finances before you embark on this path. Calculate if you have enough funds to pay the down payment. In case you want to opt for a loan, you need to have in order your credit score, proof of regular income, etc. Due to added risk of default, some lenders have more stringent conditions and a higher rate of interest in the case of loans given for property bought as an investment.
While doing the calculations associated with this investment, keep in mind that there will be sundry operating expenses. These include advertising, maintenance, fee for a property manager if you choose to hire one, homeowners’ insurance, landlord insurance, etc. Property investment experts advise keeping aside 1% of the value of the property for repairs. So, factor all these into your calculation of net yield.
Hire a Property Manager
Consider hiring the services of a property manager. It will cost you money, but it will also take time-consuming tasks off your hands. A property manager typically takes on advertising for tenants, screening them, coordinating repair work, handling delays in rent payment, etc. So, even though you stay hands-on with the activities related to the property, the day-to-day tasks get taken care of.
Location is the Key
Coming to the actual choice of property, location is the key criterion. Look at areas that are developing and coming up well. Check if the area has seen a growth in population in the last few months. Office spaces, shopping centers, etc. are indicators of growth potential. The rentals and vacancy rates in the area over the past year will give you a good idea of the trend in that location. Other factors to investigate are safety, proximity to good schools, and accessibility to public transportation.
While it is difficult to find a property that will appeal to all demography, try, and choose a house or apartment that will suit more than one or two segments. The pool of potential tenants will significantly increase and the chances of your rental property lying vacant for too long will come down.
Get the Property Evaluation Done
It may be a good idea to bring in a property evaluator to check the age of the property, condition of plumbing and electrical wiring, presence of dampness, termites, etc. Do an analysis of the things that could be deal-breakers versus aspects that might just need minor repairs. Keep an eye out for a wow factor like a backyard or a garage or extra bathrooms that can fetch a slightly higher rent.
Laws and Guidelines
Before becoming a landlord, familiarize yourself with the landlord-tenant laws. It is good to know your rights and obligations as a landlord and to also know where the law stands regarding eviction laws, disputes, damage liabilities, etc.
A rental property can be a great addition to your investment portfolio and can give excellent returns over the long term. While getting regular income in the form of rent, you will also have expenses in the form of maintenance, fees, etc. So, you need to do thorough research on a few key points so that you make the right choice that will give you high net yields. With a little bit of patience, you can end up with a wise and smart addition to your investment portfolio.