Buying a property to rent is a great way to earn passive income before or after retirement. But as with any other investment, it’s essential to do your due diligence before proceeding.
From expected returns to risks associated with this investment, there are a lot of factors that come into play. Keep reading learn everything you need to know before you buy rental property in Memphis.
Income Potential
You are investing money to make money, and as such, it makes sense to figure out if the property you’re purchasing can generate a decent income. You’ll become a detriment financially and find it hard to make more investments if the property fails to bring in a significant amount of money.
The one percent rule is a widely accepted rule that can help you make an informed decision. It stipulates that the monthly income from tenants should be equal to or greater than 1% of the property’s value. For instance, an apartment building worth $500,000 should bring in a minimum of $5000 each month.
While you may not need that much money, the monthly income should be able to cover your mortgage. This ensures that you have financial padding in the event of a lapse between tenants.
Condition of the House
There is nothing wrong with investing in a fixer-upper. However, it would help if you were realistic about the time and money needed to make the property shine. Get a qualified professional to inspect the place and figure out which of the repairs you can DIY and which need a contractor. Be sure to get estimates for the jobs that you’ll need to pay for.
An unsafe house can lead to severe injuries, lawsuits, and loss of money. As such, you want to take care of all major repairs before anyone moves in. Factor in how long the repairs will take to complete, and if the house needs to be vacant for more than three months, buying the real estate rental may be a waste of your money.
Location of the Property
Location affects the cost of a rental property and how easy it will be to find tenants. People want to live somewhere they can work and play. That said, proximity to the entertainment district, the beach, good schools, hospitals, and other amenities increase the property’s value and command higher rents.
Similarly, lower-quality homes in a neglected neighborhood will be cheaper than newer homes in the same area. Investing in renovations may attract more renters in the future and increase its rental value. If the low-quality home is near a music venue, beach, or state university, it may cost more.
Associated Property Expenses
You’ll have to pay more than just the listed price when you buy a house to rent. Additional costs you’ll incur include property taxes, homeowner’s association fees, and insurance. Interest on your financing and the cost of maintenance, in particular, are vital when calculating the minimum rent income each month or the 1% Rate.
Generally, larger homes attract higher fees in all of the above categories. This is particularly true for maintenance fees, which can prove costly for large properties. Remember that even if you want to buy a property to rent in the perfect location, high property taxes may make it a poor investment.
A home inspection is another expense you may have to incur. Splurge on a thorough inspection. Otherwise, problems that get overlooked will develop into serious issues that might damage your property.
Property Management
Being a landlord is not easy, more so if you decide to manage the property personally. Dealing with calls when there is a plumbing disaster, unpleasant tenants, and overwhelming maintenance requests are just a few of the challenges you’ll face.
Many investors partner with property management firms, which handle everything for a percentage of the monthly rent. They procure rent from the tenants, supervise repairs, and more.
Whether you choose to personally manage your property or hire a third party to do it for you, the choice is up to you. Be sure to weigh both options carefully and decide if you want to deal with problems independently or shell out a monthly management fee.
Your Ideal Tenant
The type of tenant you’re looking for will depend on your total budget and influence the type of property you purchase. For instance, students tend to rent furnished or small apartments. Families, on the other hand, need a larger space. They have their furniture, and quality plays a significant role in their choice of a rental home.
Families are the perfect tenant if you have enough money to spend on a spacious house with a large yard in a good neighborhood. Apartments or smaller homes are high-traffic areas, making them ideal for students and single tenants. Keep the personalization minimal to avoid spending too much on unnecessary work between tenants.
Weigh the Risks vs. Rewards
Before you buy a rental property, you must weigh the risks and rewards of making this investment. It will help you determine if renting real estate is for you.
The upsides of investing in a rental property include:
- Earning passive income
- Taking advantage of property tax deductions
- Increased investment value if real estate value increases
- Benefitting from diversification
- Real estate rentals are a tangible physical asset
Buying a rental property also comes with risks. Even if you do everything right, there is always the risk of losing your investment. An economic downturn may leave you unable to keep up with mortgage payments, or a tenant could cause significant damage. You may experience too many vacancies, and the value of your property may decrease.
Buy Rental Property with Memphis Investment Properties Today
Armed with the above information on how to buy rental property, you’ll be well on your way to earning a decent passive income. Consider working with an experienced partner like Memphis Investment Properties if it’s your first time investing in real estate rentals.
We have a long list of newly-renovated rentals with in-house management and will handle everything on your behalf. Contact us today to learn more.