Information on Investing in Rental Property
With homeownership rates at record setting highs, renting out properties seems to many an antiquated notion only applicable to the days before the real estate boom. This is not necessarily the case. Even with the growing threat of condos and condo conversions, apartment rentals have prevailed with apartment vacancy rates on the decline this year. Both the number of new leases signed and the increase in rent are currently the highest they have been since 2001. While the .6% ($882/month) rent increase may create a predicament for renters, it is certainly beneficial to apartment owners and the appreciation indicates a more competitive market that may drive rental prices even higher.
Along with this rent increase and the national decline in vacancy rates is the advent of several internet listing services that provide a comprehensive resource for owners and potential renters to advertise their properties and search for rental homes. Previously limited to homes for sale, these internet services are a valuable resource for everyone involved in the rental process and depict the industry’s need and decision to keep up with the times.
But as much as the rental home industry evolves, it still adheres to the basic principles of investing and requires a significant amount of research and decisions before the initial purchase. The first step to streamlining your search is assessing your financial situation and goals for profit on the property, whether you want to keep your property for a prolonged period of time or just rent it out for a couple years and sell it. Calculating the money you are planning to spend and if it will be enough to cover the maintenance and other costs is essential so that the investment is not wasted. It is imperative to understand and create a model of your cash flow patterns from the property by looking into all the positive and negative factors that can affect the profitability of the property.
Experts recommend starting by calculating the expenses that you will incur when investing in rental property; depreciation, operating expense, and mortgage interest expense. The depreciation is a tax deduction that is spread over 27.5 years, so dividing the price of the property (the actual structure, not the cost of land) by 27.5 will give you an accurate figure. Next, calculate your interest on the mortgage loan that you will be paying over the decided amount of time. The final factor, the operating expense includes insurance, property tax, and repairs.
Subtract these three sets of expenses from the amount that you are planning on charging in annual rent to get your taxable income, or loss from the property. Multiply this rental loss by your federal income tax rate to get your deductible rental loss. Your predicted cash flow is the addition of this deductible and the annual rental income minus operating expenses and mortgage payments. If the cash flow is a positive figure that will prove significant on a yearly basis, the investment has the potential for success. And, as long as the property breaks even, the owner’s equity increases, thus increasing the property’s value and the owner’s potential for high return at the end.
When investing in a property that you predominantly want to use to satisfy others, you must consider the needs of the potential renters and choose a property that will appeal to the most people. Choosing an appealing area is essential as most people want to live in a well-maintained neighborhood close to jobs, shopping, decent schools, and all the other necessities of every day existence.
There are also multiple types of property to consider when choosing an investment with single-family homes comprising a reliable source of income that require less start-up capital than the high income-generating, but expensive and high maintenance apartment complex. You also must consider your commitment to making repairs. A somewhat run-down property may be much cheaper than a home in ideal condition, but often investors do not have a reliable, cost-efficient means by which to perform the necessary rehabilitations and wind up squandering the money saved by neglecting the property.
After having the property inspected and appraised, the owner must set a reasonable rent that is dependant on several factors. Look through local rental listings for similar properties in similar areas to use as a basis for your rent rate, factoring in any special features that your property offers. If the property lacks certain basic amenities (like parking, dishwashers, laundry facilities, and cable and internet hookups), you may find it more difficult to find renters.
If so, it is advisable to rent the property for a lower price or renovate to add features, like hardwood floors, to sell the property from a different angle. Watching the market to track local trends is also essential, as a growing job market and several other factors will change the value of area home prices. Experts recommend setting the rent at a slightly higher price and seeing how the responses go, then lowering the rent according to interest.
Nowadays, with only 33% of the United States’ population renting homes, people are looking more and more to purchasing a home for the interest deductions, tax write-offs, and the skyrocketing appreciation rates. Once rental prices go above a certain rate, it simply does not make sense to rent anymore. Today’s apartment and home rental market is difficult to crack and many owners are having trouble finding renters. If this is the case, a lease-option is a viable alternative that can benefit both the owner and the renter.
A lease option provides the tenant an opportunity to buy the property at an agreed price after living under a lease for a set period of time (usually one or two years). The small upfront payment appeals to buyers who cannot afford a complete down payment for buying a house in a traditional manner and sellers benefit from the immediate cash flow that helps pay the mortgage and having a tenant who is interested in and will care for the property. There is no obligation at the end of the lease for the tenant to purchase the property.
As a compromise between renting and purchasing, there is a constant demand for lease option properties from potential homebuyers who do not have enough start-up capital for the initial purchase. Buyers build their down payments over time with the credit from rent they pay while the lease is still in effect. And renting and living in the home gives the buyer a way to test the property, so there won’t be any surprises when they purchase the home, thus minimizing risk.
Buyers can also hold a property for a low price while the market appreciates, profiting from the home’s value once the final transaction is completed. Sellers also profit from the lease option process by their unique ability to charge above the market value in monthly rent while still retaining the property, therefore receiving all the tax benefits available to homeowners.
