Where to Invest?
Looking to purchase an rental property, but not sure where to start? When it comes to rental properties there can be many variables that will either increase or decrease an investor’s return on investment (ROI). The Hobden Real Estate Team hopes to simplify the ROI calculation process as well as provide some tips to finding the perfect rental property.
Rental Properties Have To Make Financial Sense
There are 2 financial factors for deciding which rental property to purchase.
- Current income (Rent): This is the most common way we see investors deciding the potential of a rental property. This is because if your rent is not covering your costs ex. Interest expense, Insurance, Property taxes, etc. then your income property will not be making you any current income. While looking at income properties, it’s always best to have an idea of what the potential expenses associated with a particular property vs the potential rental income. Do research using local classifieds such as Kijiji and Craigslist, and see what the other landlords are asking for rent for similar properties in similar areas. A quick way to decide if a property is worth purchasing for renting is to do the below calculation:
(Potential Monthly Rent X 12) / Purchase Price = Rent Ratio
If the answer is 0.06 or higher, then the property has potential to be a rental property.
- Future income (Sale): One factor that is often still thought about, but doesn’t sway a decision as much is the potential income from the sale of a property. It’s always good to look for rental properties in growing markets. As you hold the property and bring in the rental income, it’s good to know that the value of the property itself is appreciating. Growing markets also often keep low vacancy rates which is perfect for rental properties. Now this income may be liable to capital gains tax, so make sure you research what qualifies a property owner to pay capital gains tax upon the sale within your area.
Location, Location, Location
Be aware of where you property is located, especially if you are not local to the area. Depending on the location, the rental income can vary quite drastically. Always speak with a Realtor who is knowledgeable of local areas and preferably one who knows a little bit about the rental market. If a property is cheap, there’s a good chance its rental income is equally as cheap. The goal should be to find an up and coming area, that is growing fast but property prices haven’t quite caught up.
Know the Rules
Owning a rental property can be a lucrative business if done right, but always make sure you are following your local tenancy laws. There are specific rules and regulations for every step of the process including finding a tenant, starting a tenancy, during a tenancy, ending a tenancy and resolving issues. It’s best to read the rules through the full process prior to purchasing a rental property to be sure you are comfortable abiding by the rules.
In the long run, it is expected that income properties will bring in a profit. In the short term and periodically throughout the investment, you may have to pay out for your rental property. Whether it be needed renovations such as a new roof or broken appliance like a washer/dryer you need to be prepared with a little extra capital to fix these issues before they become bigger problems. Same goes for vacancy of the property, in a growing market the vacancy rate can be close to 0%, but this doesn’t mean that you are guaranteed to have a tenant 100% of the time. Make sure you are able to afford the mortgage on the income property at least for 3-4 months in case the property does become vacant for some time.
A rental property in the right market, for the right price, with the right landlord, can be a strong investment. Make sure you do your research and wait to find the perfect property that makes financial sense. Contact the Hobden Real Estate Team today with any further questions or inquiries on investment properties.