High mortgage rates and rising inflation have led to increased monthly payments, making homeownership quite costly. This has made rentals attractive for those looking to invest in real estate. While rental properties are lucrative, multiple elements go into ensuring a successful investment. Discussed below are five key factors to consider when buying a rental property.
1. Property taxes
When investing in rentals, you want to ensure that your investment delivers the highest possible ROI. Although rental investing is a great way to make money, property taxes, an expense you as an investor should account for, directly impact your rental property’s profitability. Your property tax obligations depend on local tax rates and your investment’s assessed value. Adhering to property tax payments is crucial to maintaining compliance and avoiding penalties.
High property taxes can lower net rental income and impact your investment’s viability. It’s imperative to evaluate rental property taxes, which vary by state, and their effect on rental income. Assessing property tax rates by state can help determine the best state to own rental property. In addition, understanding local property laws and seeking direction from tax experts can help you optimize rental income and property tax-related implications.
2. Job growth and cost of living
Job growth and cost of living are major considerations when buying a rental property. Wage and job growth make rental investing more desirable. If the area you intend to buy a rental property in has low job prospects and a high cost of living, finding tenants will be very hard.
You should opt for locations whose employment opportunities are on the rise and a low cost of living to attract more tenants. Exploring various online resources such as the Bureau of Labor Statistics can help you learn more about job growth and the median annual wage of different cities and states.
3. Operating expenses
Operating costs are necessary for maintaining a rental to ensure it generates income. These expenses impact your property’s day-to-day operations. Understanding these costs enables you to determine the profit and cash flow to expect from your rental property investment. Operating expenses include:
- Advertising and marketing costs
- Property taxes
- Utilities like water, trash collection, and sewer
- Insurance costs
- Professional property management fees
- Maintenance and repairs
- Pest control and snow removal
Depreciation, mortgage payments, investor income taxes, and capital expenses aren’t considered rental property operating expenses. Rentals with high operating expenses aren’t a viable investment option.
4. Location
Location is crucial when looking for a rental property to buy, as it impacts rent rates and future growth. It determines your property’s desirability, proximity, and access to public transportation, amenities, and other public services.
A location with low supply and high demand for rental properties is ideal for investing, meaning there are many prospective tenants, but the available rental properties are limited. Opt for a location in a desirable neighborhood with high rental demand and great amenities to attract tenants and ensure low vacancy rates.
5. Crime rate and safety
Safety is a major concern for renters because they prefer living in low-crime areas. Researching an area’s crime rate before purchasing a rental property helps ensure you make the right investment decisions. The best rental property should be in an area with high safety and low crime rates.
Endnote
Numerous considerations go into finding the right rental property. Considering these key factors when buying rental property can help you find the best one for your investment purposes.
