Morning! Every other Monday, we look at ways to make money with real estate. You can check why I think real estate is one of the best ways to build wealth here. Today we move on to the check list before buying a rental property.
Buying a property is one of life’s most stressful events. Most people will hire a company like Mayflower and do it once or twice in their lives and have no idea where to start. But generally, your future home is where you will live for the next 20 years, so it doesn’t matter that much if you buy a little too high or don’t do your full due diligence before buying. With a rental property however, things are different. You cannot afford to make a mistake, or that will impact your returns, meaning all the efforts you made were just to land a bit above a safe savings account rate. Here is a little check list to help you.
You know what they say, location location location. It actually depends on the property you have your eyes on. Looking for a 1 bed property in a neighborhood that is family oriented means that your target tenants will be less than if you buy the same property half a mile from a college campus.
Picture yourself as the target tenant. A central location with no parking space? That is going to be a hassle for your tenant. An “up and coming” neighborhood with lots of bars? Don’t dream that your tenants will be a lovely retired couple.
What do you need, as your tenant, to live there? You don’t have to mind the school district for a 1 bed unit, but being walking distance from a supermarket can be a plus. And so on.
Type of property
Again, depending on your budget, you can afford to buy a certain number of rooms or of square feet. That’s great. But think about your target tenant once more. A four bed house with a very small living room? Target tenant will probably have two kids or more, so a small living room will be a deal breaker. It could do if you plan on finding four young professionals to be roommates. If you plan on the roommates tenants, are there enough bathrooms? Are they accessible without going into one’s room?
Generally, you need 25% down in order to get a buy to let mortgage. The bank will also have other requirements, such as the potential rent being 125% at least of the mortgage repayments. But just because the bank is willing to lend you a huge amount, doesn’t mean you should borrow everything they offer. Think about the worst case scenario. Property stays empty for a year, can you cover the mortgage or will you have to agree on a short sale $20,000 under what you paid for just to get out? The later could ruin you, your credit score, and annihilate your nest egg.
So be very careful before you venture into real estate.
Taxes and fees
Buy to let mortgage generally have higher fees than residential mortgages. Make sure you run all the numbers to confirm the property is still a sound investment with those fees.
You will have to pay taxes on the property, and taxes on the rental income. The additional income may make you jump up one tax bracket (estimate that using any simple online tax estimator), is the operation still financially sound? Can you operate under a company name instead? The implications are complex and you should consult with your lawyer before you decide on anything. DO NOT skimp on the lawyer fees, it will hurt to shell out a few thousand for professional advice but unless you are a seasoned investor, this is money very well spent to prevent you from running your operation to the wall.
How much work do you need done before you can rent the property? How much will that cost and how long will that take? During that time you will be spending more money and have no rental income. If it is just a painting job or cleaning carpets, you may offer your tenants a first month free to take care of it themselves. My tenants often try to fix things around the house because they like to live in a nice place, and I immediately cover the expenses they incur.
If more serious works are needed, will you DIY or hire a company? Make sure you clearly define the terms with a contractors so there are no bad surprises or delays. Include an additional 10 to 20% of the estimated cost of repairs and renovations into your calculations because there will be bad surprises and delays…
Until you actually own the property, it is a bit hard to determine whether it will rent or not, but you can try a few things. Put a fake ad online and see how many replies you get. Play with the rate a bit and see the soft spot where demand starts to decline. Check out the listings at a nearby agency and see how long the property stays listed. Realtors will always tell you that you can rent your place for $1,000,000 more than market so you give them the business, take their opinion with a pinch of salt, but look at the facts: a listing gone is a rented place. How much did it go for you’ll never know exactly, but the listed price was fair enough to attract viewers.
What else would you look at before buying a rental?