Purchasing A Rental Property? 6 Tips For A Wise Investment
Real estate has long held immense earning potential.
The property market is booming, and investing in a rental property is more popular than ever.
With house prices on the rise, many first-time investors are looking to jump on the rental property bandwagon. However, some come less prepared than others. It’s one thing to have the down payment, but it’s quite another to make a wise purchase on a second property.
With proper preparation and financial backing, anyone can become a rental property owner.
Here’s what you need to know to make a wise investment decision.
1. Prepare for life as a landlord
Before purchasing a rental property, you need to ask yourself if you’re cut out to be a landlord.
You’ll be responsible for providing a decent home for your tenants in return for their rental payments. This means you could be called upon at any time to arrange quick property repairs that cause minimal disruption to your tenant’s lives.
How often will you conduct property inspections? What will you do if your tenants are late with their rent? Will you need to make any upgrades to the house before tenants move in?
These are all questions you need to ask yourself before becoming a landlord.
If responsibility isn’t your forte, life as a landlord may not be for you.
2. Understand your legal obligations
As with all property ownership, a rental property comes with a series of legal obligations.
In this case, you’ll have legal obligations both as a property owner and a landlord.
It pays to be well-versed in all of your local property laws to avoid a potential lawsuit. As a landlord, you’ll have several additional rules and regulations to abide by, such as providing habitable housing and respecting your tenant’s privacy.
Sit down with your lawyer to determine what’s expected of you as the property owner and ensure you adhere to all legal responsibilities.
3. Team up with an accountant
If you’re set on making a wise investment, you will need a good real estate accountant behind you. An accountant will optimize your tax position, improve your returns, and keep you out of trouble with the taxman. In addition, with a grasp on sudden tax changes and trend fluctuations, your real estate accountant will protect your finances from unexpected shock.
An accountant you can trust is invaluable. If you wish to purchase more properties in the future, your accountant will help you make better financial decisions to achieve this goal.
4. Calculate potential earnings and costs
The number one reason to invest in a rental property is to build your asset portfolio and earn a second income. However, what many people don’t realize is that there are also significant costs involved.
You need to calculate whether your rental price is enough to cover your mortgage as well as:
- Routine maintenance costs
- Property tax
- Unexpected repairs
- Accountant fees
- Lawyer fees
New investors need to be prepared to potentially make a loss on their rental property in the first few years. However, real estate is a long term investment that boosts your assets and almost always has significantly high returns at the point of resale. It’s not until you’ve accumulated multiple investment properties that it’s wise to use them as your sole income source.
Keep your day job and ensure you’ve got a good financial buffer to cover costs when you’re starting your investment journey.
5. Location is everything
Your rental location is as important (if not more important) as the house. The location will determine your long-term investment goals, so it’s wise to seek properties in your chosen locations.
Research areas where the property market has a history of steady increase. This doesn’t mean you need to buy in the most expensive neighbourhood; it means you should look at houses in up and coming areas with good earning potential on future resale.
Get advice from a local real estate agent to find the areas where prices trend upwards.
6. “Do-up” properties aren’t always cheaper
Purchasing a property in need of renovation may seem like a good way to secure an investment property at a cheaper price. This is true in some cases, but for most do-up properties, the cost of renovation ends up being much higher than the owners budgeted for.
Older houses are more susceptible to requiring major repairs beyond a quick lick of paint and some new carpet. Areas you can’t see, such as guttering, roofing, and insulation can incur much higher costs than superficial interior upgrades.
If you’re looking at purchasing a do-up, have a draftsman draw up the cost of renovation before you sign away your savings.
Purchasing a rental property is a lucrative long-term investment for the well-prepared. If you’re looking at buying a second property, don’t go into it blind. Do your homework around what it means to be a landlord, and be sure to seek accounting, legal, and real estate expertise before jumping on the investment property ladder.