Buying real estate can be a smart investment to diversify your income. Just like any business endeavor, it’s important to do your research and have a plan going into the process.
What to consider when buying a rental property
Location
Whether you’re buying your own home or looking for a rental property, the top item to consider is location. You can change cosmetic features about a house, but you can’t as easily change the location. A home in a desirable neighborhood will naturally attract your target audience.
Think about:
- Distance and quality of nearby schools
- Distance to convenience stores and grocery stores
- Crime rate in the neighborhood
- Current or upcoming economic development plans that could affect the value of the property
Landlord responsibilities
It’s important to educate yourself about your new adventure. Take time to understand landlord laws, familiarize yourself with state statutes, tenant rights, eviction considerations, security deposits and lease agreements. Make sure you’re comfortable handling tenant issues and prepared to cite the facts if needed. Joining your local apartment association is a good resource for education and industry updates, and to build your network of fellow landlords.
As the property owner, it will be your responsibility to maintain the property. Are you knowledgeable in property maintenance and able to fix household issues that might come up or will you need to hire someone? If you don’t have the skills personally, this could be an additional expense to outsource to a professional.
Calculate your ROI
Consider how much you will pay for the property and what expenses you will incur versus how much income you will bring in and at what point you will begin to make a profit.
The expenses of a rental property may vary depending on the type and size but a few constants you can anticipate include:
- Mortgage
- Insurance
- Property tax
- Repairs and maintenance
Think about how much you will need to charge for rent to be competitive in the market but still cover expenses. Do a market analysis of the other rental properties in the area, amenities they offer and set your price from the data. At minimum, the rent should cover the mortgage but be careful as that doesn’t allow for any additional income to be reserved for emergency expenses.
There are many unexpected scenarios that you need to be financially prepared for. What if the hot water heater goes out? What if a faucet leaks, the floor gets damaged and needs to be replaced? If you have a period of vacancy with no income, can you still make your payments?
Calculating your ROI tells you how much you’ll earn relative to how much money you’ll invest.
Net profit ÷ cost of investment x 100 = ROI
Get insurance
Always be prepared for the unexpected, that’s what insurance is for. Especially when someone else is living in a home that you own. Research shows that rental properties are more accident prone than owner-occupied properties. As a landlord, it’s important your rental property is properly insured to cover physical property to the building, liability, and loss of rent coverage. Rural Mutual offers additional coverage depending on your situation including equipment breakdown, ordinance or law coverage, backup of sewer and sump pump overflow, and more.
Insurance for rental properties does not cover tenants’ personal belongings so it’s important your tenants have renters’ insurance.
Why is renters insurance important?
- Protects their personal belongings from threats such as fire, vandalism or theft
- Protects yourself from lawsuits filed against you
- Provides living expenses after a covered loss
Work with a licensed real estate agent and insurance agent to guide you through the process and provide peace of mind. Contact a local Rural Mutual agent to get a quote for rental property insurance.
