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Making investments to guarantee your future financial stability is a wise decision. Now, if you have narrowed it down to real estate property where you can earn a steady rental income, you should know the tips and tricks to find the best one.
In the heated market today, with properties on the market for less than a week, it is essential to find the right property to maximize your returns. Check out the estimated return rate on a rental property using a capitalization rate calculator. This will allow you to compare the proposed real estate investment versus other options.
There are five major things that you should look out for when purchasing an investment property that is focused on rental income.
1. Neighborhood
The neighborhood is one of the most crucial points to note; this will determine the type of tenants you get, vacancy rates, and crime rates. If the property is near a university, it will attract many students, which will reduce the vacancy rates; if the property is near a good school, it can attract families who want their children in those schools. Overall investment growth will also improve if the neighborhood is constantly improving.
2. Property Taxes
Property tax can be an additional expense resulting from the property. Some areas have higher taxes than others, so check the property taxes in the area. However, a high property tax is not always a bad thing because it could mean it’s a great area with excellent infrastructure. It is also essential to check if property taxes will likely increase soon. A town in distress is likely to increase taxes.
3. Total Return & Average Rent
This factor will look at how much you could earn after purchasing the property and renting it out. If the rental income covers the mortgage, insurance, and taxes, check that the average rents are high enough to meet the required amount. Rental property calculators can help see if you are earning enough rent to cover all expenses and how long it will take you to recoup and earn a profit. It is also important to estimate whether rents will increase in the future. Some aspects to check are –
- Vacancy Rates: This factor determines how many units are vacated as a percentage of the total units available. A low vacancy rate is preferable, meaning there is a constant demand for properties.
- Days on Market: How long properties are on the market tells you how quickly you can find tenants.
- Population Growth: This is a long-term factor that will determine future potential
- Is there new infrastructure being built? Are there new amenities? More organizations?
It is important to identify the best investment for your goals on your property. A capitalization rate calculator will help you determine a definitive value based on the overall market averages that will help you earn a profit.
4. Age of Property
If the property is in a great neighborhood but is extremely old, you are more likely to spend funds on renovations and additional maintenance once the tenant moves in. You don’t necessarily need to buy the newest and most expensive property on the block but beware of 60 years old homes that are old and creaking and require a new HVAC system!
5. Natural Disasters
Now although this seems like a straightforward point, it can make or break your investment decision. If the area is prone to earthquakes, flooding, or other potential disasters, then the insurance in the area is likely to increase. Higher insurance can reduce your overall profit from the investment. Also, in the worst-case scenario, if something happens to the property, it can lead to a loss of time and money.
In conclusion, a rental property can be a great investment property in the current market environment. With lower mortgage rates, a property can be purchased at a lower financing cost. However, the overall market prices are rising, making purchasing one expensive. Estimating your total return and costs is essential to see if you can afford it soon. In any case, check your short-term liquidity and long-term goals before making any decision. Good luck!
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