Investing in Rental Real Estate: 3 Important Factors to Include When Calculating Overall Cost
More and more Americans are shifting to renting rather than purchasing their home due to increasing costs of real estate. In fact, around 41% of Americans rented their home in 2014, and it appears that more and more households are choosing this route.
With these numbers in mind, now might be a great time to invest in and purchase real estate; however, not all properties are going to lead to large profits. Some rental properties are actually costing their investor and creating a deficit each year.
To avoid falling into this trap, carefully calculate the overall cost involved with maintaining and keeping each property. In particular, keep these 3 important factors in mind when considering your real estate options.
The Condition of the Home & Replacement Costs That Follow
Although real estate property is usually an appreciating asset, the value of the physical home itself is depreciating. This is due to the fact that things, like the plumbing or kitchen appliances, start to break down year after year with gradual wear. Even if they don't break down, they require maintenance and repairs. As a landlord, you will be held responsible for providing the repairs and maintenance needed.
Before purchasing an older home, you'll need to carefully inspect the condition of not only the outer structure of the home, but the inner mechanisms as well. Note the condition of various aspects of the home, as well as the costs involved in repairing or replacing those features.
Make a note of the total cost of replacing all of these things at once and when you might be expected to replace them. For example, if a particular appliance generally lasts approximately 8 years, and it's already been in use for 5, you're probably looking to replace the appliance in 3 to 5 years; however, if the appliance is already 20 years old, you're probably going to have to replace it immediately. Tally up these costs to determine how much you're going to have to spend on repairs.
The Appreciating Cost of Insurance & Taxes
The overall costs of home insurance and property taxes will likely appreciate each year. Even if your property doesn't appreciate in value, these expenses are likely to appreciate due to inflation. Before you get ahead of yourself and invest in real estate property, ask the current homeowner to provide you with more details concerning how much they are paying for home insurance and property taxes this year.
It's important that you take a look at the home insurance policy to determine whether it provides sufficient coverage. Keep in mind that you might be expecting higher home insurance costs than the current homeowner if the current homeowner is not renting the property out.
Call an insurance agent to get a good idea, as to how much the cost of home insurance increases each year. You can even take a look at city records to determine how much taxes increase by each year as well. These expenses are absolutely mandatory and need to be included in your calculations as well.
The Vacancy Rate & Costs in Your Area
Regardless of how great of a deal you're getting the real estate property for, you need to keep in mind that the rental unit will likely stay vacant at times. Unless you find yourself a long-term renter that plans on staying for years in the rental unit, your unit is going to be vacant at times for weeks, if not months. Consider just how affordable renting in the neighborhood may be and consider whether there is a huge demand for rental units as well.
If the property is located near a university or a college, you can basically expect your unit to be rented whenever school is in session. On the other hand, if your property is basically located in the middle of nowhere, it's going to be difficult to find renters who basically are looking for a secluded place.
Know what type of rental units are in high demand and are going to rake in a fortune in rent, and you'll make better decisions on which real estate properties to invest in. Don't be too quick to make a bid or an offer when you see a property you like. It's vital that you take a look at what the property has to offer first, and calculate how much the property will bring in with rental income versus how much it will cost you each year.
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