What you should know when buying rental property
Before you buy a rental property, check out these seven things that many homeowners turned landlords didn’t think of when they first bought their properties. We’re outlining some things you should know about buying rental property. Don’t miss out.
The rental market in the United States is stronger than ever, with many young people opting to rent in cities rather than buy their first home. The fact is, the younger generation prioritizes different things than generations past.
College debt and older child-rearing years mean millennials are renting well into their twenties. And the more renters, the larger the demand and the stronger the rental market.
It’s why you need to capitalize on the trend when you’re thinking about investments. Crowded, desirable markets like the southeast Florida area just keep seeing home prices climb.
Diversifying your investments is always wise. Rising prices combined with strong demand makes the southeast Florida real estate market one of the smartest ways to hedge your portfolio.
Today, we’re bringing you seven things to know before buying a vacation rental property.
Location, Location, Location
The local real estate market is the single most important thing to look at before buying your rental property. If there’s no demand, you won’t find any renters.
Always search for markets with low vacancy rates and high demand. Low vacancy rates mean higher rental floor prices and high demand means enough renters to guarantee you’ll fill your unit.
Plus, areas with limited properties, while representing a costly investment, also represent an opportunity for your property to appreciate in value over time. As your property values rise, you’ll passively make money on the investment, in addition to collecting rent.
Location Continued: Taxes
Beyond location affecting supply, demand, and long-term value, where you buy rental property also affects how much you’ll pay in property taxes. And while it might not seem like much, property tax varies enormously by area.
For example, Delaware residents only pay 0.43 percent of their home’s value in property tax. New Jersey residents pay a whopping 1.89 percent.
You need to ensure your rental property commands a high enough monthly rent price to make up for what you’ll pay in property taxes. For those looking to buy property out-of-state, hot markets with low property taxes, like Denver, represent a good investment.
Rental properties come with all the responsibilities of owning a home, despite the fact you won’t live there. Potential landlords often fail to account for unexpected expenses that arise both during the purchase process and later into their rental ownership.
In the long-term expect some unavoidable costs. Roofs need replacing, furnaces wear out, and siding needs upgrades. It’s not an if, but a when these things will cost you money.
Plus, larger rental properties (apartment buildings, not individual homes) cost even more to maintain long-term. Industrial furnaces especially drive up costs.
During the purchase process itself, you need to watch out for sagging floors, the current roof condition, water damage, termites, etc. It’s very important to hire a professional home inspector to ensure you’re not buying a house with significant damage.
Homeowners insurance is a must for any landlord. Just like your vehicles, you’ll want to protect your property from fires, natural disasters, and other events. How much coverage you need directly depends on both the property’s location and your expected return on investment.
For instance, areas prone to natural disasters have more expensive insurance. Likewise, the more you spend on insurance the less ROI you’ll see from rent.
Policies with higher premiums mean lower deductibles when disaster strikes but less ROI upfront. Lower monthly premiums mean more income but higher deductibles.
Depending on your schedule, your potential rental property’s location, and more, you might consider hiring a management company. This entity can handle rent, leasing agreements, and more.
While you can manage property down the street from your home, that doesn’t mean it’s worth your time. And a property management company is mandatory for property in other states.
When you’re dealing with an out-of-state property you need someone to handle day-to-day tasks. This person can help sign leases, forward documents, and interact with tenants. Factor in a management fee when determining your eventual profit.
Gentrification and Shifting Neighborhood Demographics
People like to live with other like-minded people, and it shows through neighborhoods. But in growing areas (read: hot real estate markets with long-term value), gentrification sometimes turns areas on their head.
The trendy markets explode into value while what were once middle-class neighborhoods can sometimes see a downswing in property values. This happens as new residents move in as they’re forced from gentrifying areas.
All in all, it’s difficult to imagine what a neighborhood will look like over the next twenty years. So it’s always best to buy rental property situated in the middle of several affluent neighborhoods.
The more well-off the neighbors, the better chance the area only sees property values increase.
Last but not least, each state and city has its own set of tenant’s and landlord’s rights that govern landlord-tenant interactions. Some areas favor the landlord, while others favor the tenant.
While we encourage you to avoid areas with over the top tenant rights (ie: the inability to evict squatters), most areas are reasonable. Though do ensure you’re aware of your own rights and the rights of your tenants.
Simple things like security deposit returns are often governed by a complex set of laws that can have serious financial implications if you fail to follow those laws.
Interested in Buying Rental Property?
Buying rental property isn’t for everyone, but for those interested in buying rental property, stick to this guide to ensure you’re making a wise investment. Done right, rental properties can help earn passive income with extremely low stress and risk.
So if you’re ready to start your investment journey, get in touch with us. Our real estate team has the experience in the southeast Florida area to help you find the best rental property for your circumstances.
Let us help you diversify your portfolio today.
Today’s Real Estate article “7 Things to Know About Buying Rental Property” was written by Joy Bender for Imagine Your House and Lynn Pineda.
About the author: Joy Bender is co-founder of Aumann Bender & Associates with Pacific Sotheby’s in San Diego. Her team represents extraordinary homes in a variety of lifestyle categories and price points. Joy helps real estate professionals learn how to create real estate digital marketing to generate leads, learn about breaking into the high end of their market, and about selling to the affluent in her free Facebook Group: Selling Luxury – Digital Marketing.
Additional Related Resources:
“28 Tips to Buying your First Rental Property” by Fit Small Business
“20 Real Estate Facts in Home Buying” by Lynn Pineda
You’ll find Lynn selling homes in Southeast Florida in the cities of Boca Raton, Boynton Beach, Coral Springs, Delray Beach, Coconut Creek, Deerfield Beach, Margate, Parkland, Pompano Beach, Tamarac, Sunrise, Plantation and Ft Lauderdale areas within Broward and Palm Beach counties. Call Lynn at 954-464-1100 if you have questions about buying a rental property in Boca Raton to Coral Springs and beyond!