Who doesn’t love financial freedom? Having a passive source of income is a dream come true for all of us. If you too are looking to generate residual income, there can be nothing better than investing in real estate!
Purchasing a rental property is a smart decision that will give you benefits in the long run. You can easily pay off your monthly mortgages from the rental income.
But still, buying a rental property is not an easy task. You have to consider various factors including your budget, location, taxes, loan plans, etc.
Don’t know where and how to get started?
It’s all right! We have got you covered all the crucial factors that you must consider before buying a property for rent Also, find out how to evaluate the risks and returns of possessing a rental property.
Ready to make an offer? Wait for a little and read this guide to know everything about rental property!
Want to prepare rental documents at affordable prices?
USM experts will help you create notices, lease agreements, amendments, applications, and others!
Key Information about Rental Property
- Well-performed research before buying a rental property can create a steady source of residual income.
- A wrong investment in rental property can increase your monthly expenses. For example, you may have to bear maintenance charges, damages, and many others.
- Keep in mind that your rental property can remain vacant for months. So do not rely only on rental income to pay your property mortgages.
- Always hire a professional or real estate agent to examine the location and know the actual worth of the rental property. It’s important to make a smart and informed decision.
How Much Rental Property Income Can You Expect?
One of the major reasons for investing in rental property is to make it a reliable source of income. Isn’t it?
When planning to purchase a rental property; it’s important to determine the exact potential of the property. Make sure you have the answers to all the below questions
- How much monthly income can it generate?
- Are there any damages?
- Is it worth buying in the location?
- Nearby facilities?
Let’s say you buy a rental house for $200,000:
- According to the location, you found that the average rate is $2,000 every month.
- Now, calculate the gross income (excluding other expenses). It will be $24,000 per year ($2,000 x 12 = $24,000).
- That means the property has the potential to offer 12% gross income on the buy price.
To get an estimate of whether or not the property is capable of generating a good gross income, use the 1% rule.
“The 1% rule states that the minimum gross income should be 1% to bear the maintenance, damage, and other property expenses.” If your rental property can generate above 1%, it is definitely worth buying!
But still, you should not rely only on the 1% rule. The quality, location, and other factors also matter while investing in a rental property.
Expenses of Owning a Rental Property
When it’s about expenses, always keep in mind the 50% rule. If your property generates a gross income of $24,000 annually; you have to set aside $12,000 for other expenses.
Property expenses can be of two types:
Operating expenses
These are the regular property expenses such as:
- property taxes
- property insurance
- routine maintenance
- Damage costs
- property management costs
- and vacancy costs, and others.
Capital expenses
Such unplanned property expenditures may take away a large part of your gross income. It may include:
- AC /Water heater replacement
- Repairing damaged roof
- Fencing,
- flooring,
- and Plumbing.
Benefits and risks of buying a Rental Property:
Investing in rental property is one of the biggest financial decision and have both risks and rewards. If you can buy the property without a loan, it can generate a high cash flow. It’s a smart investment for senior citizens or retirees with a limited source of income.
The property prices keep on fluctuating. So you can even resell when real estate prices are at their peak.
Now talking about the risks, think like a property owner whenever you plan to buy a rental property. There are taxes, insurance, closing costs, recurring expenses, and many others. So, be prepared for it!
| Benefits | Risks |
|---|---|
| A passive source of income. | Possibility of bearing vacancy cost. |
| Better chances that property prices will rise in the future. | You may have to deal with bad tenants. |
| Rental property tax deductions. | Operational/ Capital expenses. |
| Easy to pay monthly property mortgages. | Investment in bad property may result in spending more. |
| Advantages of geographical diversification. | The property price may fall with time. |
Important things you should know before purchasing a rental property:
Location, Location, Location!
Location matters the most when buying a rental property. Almost everyone wishes to Invest in a property that is close to their workplace and primary house.
For example, a house located in the city center, a beach, a shopping center, or an entertainment district has a high potential for rental income.
But buying rental property in the primary locations also comes up with high insurance premiums and closing costs.
So it’s better to make an informed decision depending on your budget, and other preferences.
Renting can be Risky:
Many times it happens that owners encounter bad tenants that may damage the property or won’t pay monthly rent on time. So be prepared to handle such situations as you may end up bearing more losses than profits.
For example, the Covid-19 breakdown was such an unfortunate situation when landlords had to accommodate the tenants without taking any rent. They end up depleting their budget and years of savings.
Document everything:
Before you agree to rent your property, make sure to collect all the required documents. It includes:
- Rental application.
- Police verification
- Lease agreements
- Damages & repair charges.
- Eviction notices
- ID-Proofs, and others
Well, US Mortgage offers everything for rental property owners including the facility of e-signed documents for all kinds of properties.
Need any legal advice?
Who is an Ideal Tenant?
The definition of an Ideal Tenant depends on your budget and the size of your house. For example, couples or a family of 4 members may look for quality and require 2 or 3 BHK. They already have the furniture and may plan to live for at least a year or two.
So, if you have the potential to finance expensive properties then families are your ideal tenants.
Whereas a student. singles or employee needs a well-furnished apartment as their stay is temporary. Also quality is not an issue for them.
Recognize a Bad Tenant:
It’s important to screen your tenants before you rent out your property. So, how to identify the bad tenant?
- Verify their employment history.
- previous rental record.
- A criminal background check
- previous eviction history if any?
If you found anything suspicious, it’s better to skip and consider another applicant. It’s best to sign the contract with a clean record renter.
Property Expenses:
Don’t get wronged by the listed property price. It isn’t the final price. There are other hidden and common charges you need to be aware of:
- Property taxes
- Insurance
- Homeowners’ association fees
- Maintenance
- Financing interest
- Home inspection
Large properties will cost you more in terms of damages, and maintenance charges. Although a home inspection is optional. But still, getting an expert’s advice will give you benefits in long run. They can easily judge the quality, wrong wire connections, and other hidden damages.
Plan For Contingencies
Always be prepared for the times when your property will remain vacant for months. So always have a backup plan for paying monthly mortgages. Especially if you have rented your property to college students, most of them don’t attend the campus in summer.
The next situation is you may have to evict some nasty tenants that can cost you huge. So make sure to keep aside rental expenses for two months.
Keep an Eye on Homes With Outdoor Space
Most of the renters look out for properties with a large deck, backyard, inner courtyard, and patio with a view. You’ll never regret investing in such properties.
As it allows them to personalize the space without making any substantial changes to the property.
For example, people in warmer areas prefer to spend more time in outer areas whereas a large deck and stone fire pit is useful for renters in cold areas.
Make sure to get an Airtight Lease!
Do you know what a rental agreement must include? How to avoid legal complications? Most of the owners who purchase and rent out the property don’t know what to include in the lease.
There are many loopholes in the rental documents that the renters may take advantage of!
For better safety and security, contact USM legal advisor to include everything in your lease agreement. You can add any clause in your agreement such as:
- To allow the pets or not.
- Bond back terms & conditions.
- Essential Move-out cleaning.
- To call or not call during repairs and maintenance and others.
Frequently Asked Questions
Can I buy a rental property with a mortgage?
Luckily if you get qualified, you can buy the rental property with a minimum 20% down payment. You can then fix your monthly mortgage payment with the private lender.
Can I use my primary home for a rental property?
Yes, there is no such hard and fast rule or legal litigation to turn your primary residence into a rental house. But still, if you are already playing the mortgages it’s better to consult your mortgage company to check if there are any restrictions.
Do I need to pay taxes on the rental income?
Yes! Almost similar to paying income tax returns, you need to pay federal tax on rental income and report. At present, there are nine states in the U.S. where the residents don’t need to pay an income tax or rental income tax. It includes Alaska, Washington, Wyoming, South Dakota, Florida, Nevada, New Hampshire, Tennessee, and Texas.
Final Verdict On Rental Property:
This article contains every little detail from purchasing to renting out the rental property. So, use the information to make an informed decision when buying a rental property.
There are many factors such as cost, potential income, and ROI (Return on Investment) to know the exact worth of a property.
Don’t worry! Buying a rental property is no more a difficult job with a US Mortgage Corporation!
Feel free to contact us at (800) 562-6715
Also Read: How to buy a house when there’s a shortage of houses?
