What Should You Consider When Investing In Rental Real Estate?

Posted on: 6 April 2015

If you've always wanted to diversify your income stream by purchasing and renting out single-family homes, there is no better time than the present. An unprecedented drop in real estate costs throughout the country has allowed many would-be investors to purchase and rent out homes for a significant profit. However, there are a number of important factors that contribute to a successful real estate transaction. Read on to learn more about the factors you should consider before determining whether a specific home is a wise real estate investment.

Watch out for hidden costs

When analyzing whether a specific home is a wise purchase, be sure to take into account the entire array of expenses associated with the home. Property taxes are often one of the largest (and most non-negotiable) expenses. In addition to looking up the current property tax rate and the assessment value and exemptions upon which it is based, you may want to investigate the state and locality laws governing these taxes -- including any property tax caps or "holidays." Property taxes may appear artificially low if the current homeowner has several exemptions or if the area is under a temporary tax holiday and rates are set to rise steeply in the future.

Another common hidden cost of rental homes involves the homeowners association (HOA). Many homes are now subject to an HOA, and in exchange for the services provided (which can often include exterior maintenance, trash pickup, neighborhood watch, and other amenities) you'll be assessed an annual fee. If you purchase a home subject to an HOA, there is no way to opt out of this organization -- you'll be responsible for the annual fee whether or not you have a paying tenant.

When determining the rate you'll need to charge in order to make your transaction a cash-flow positive one, don't forget about property taxes and HOA fees, which can subtract hundreds of dollars per month from your bottom line.

Analyze your rental market

Even if you can purchase and maintain your rental home at a very low cost, your transaction won't be cash-positive until you find a reliable and responsible tenant. Frequent turnover or tenant damage can quickly eat into your profits, as well as cause stress and hassle. It's important to purchase rental homes in areas that are attractive to good tenants and to adequately screen tenants for a criminal history or previous eviction.

Although some landlords have had good luck with renting to college students, others are wary of loud or destructive parties. You may want to spend some time (at all hours of the day) in the neighborhood in which you're seeking to purchase, so that you can observe foot traffic and other activity. Not only do you want your property to remain safe and free from damage, but you'll want your renters to remain safe as well.

Get your best loan

Financing the purchase of a rental property may be the last hurdle. Although personal mortgage rates are barely rising from their all-time low in 2012, the lowest rates are often available only for owner-occupied homes -- not rentals. In order to qualify for the best rental rates, you'll generally need a hefty down payment as well as sufficient cash reserves to make any needed repairs or renovations before renting.

For this reason, many real estate investors recommend starting small -- with a single-family rental in a working-class neighborhood. After you have established a year or two of solid and steady rental income, your total household income should be high enough to qualify for larger loans on additional homes. For more information, contact a local real estate company like Realty Executives.