8 things you should know before buying a rental property
Many people have successfully invested in rental properties, but this does not mean that it is easy money. Like any business, there are ways to increase your chances of success and reduce risks. Before buying a rental property, you need to know the following.
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1. Not all property is a winner.
Not all attributes are the same. A good rental property is not necessarily the property you personally want. You need to understand what potential tenants are looking for.
For example, you might find a small house with two bedrooms and one bathroom. However, the reason why the price is so cheap is that the main population in the area is families, and no one wants such a small house. This may not be a good investment.
2. Location is always important when buying a leased property.
Location, location, location. This is a cliché, and there is a reason. People want to live where they work and play. Houses located in the city center or near major employers almost always charge high rental values. The same principle applies to houses near beaches, entertainment areas or other popular facilities.
Of course, you may also end up paying an additional fee to purchase a leased property in a prime location. You need to perform mathematical operations based on your own situation and the factors that are important to you to ensure that it is still a good choice.
3. The general rule for rent is 1% of the value of the house.
The general rule of thumb for calculating the price when buying a leased property is that it should generate at least 1% of the monthly rental value of the house. If you buy a leased property worth $100,000, you want to get at least $1,000 in rent per month.
This is just a guideline and may vary depending on local market conditions. A competitive market may have lower profit margins, or you may initially accept lower rents because you believe that prices will rise faster than inflation. If you plan to make a major renovation of the property, you can cover these costs with a higher rent.
4. Tax incentives will be different.
If you buy a rental property just for renting out, then you are Operating business. This means you can usually deduct maintenance and improvements that the homeowner cannot deduct.
On the other hand, you may have to pay income tax on rental income. In addition, you may not be eligible for a property tax exemption for your primary residence, or you may be required to pay a higher property tax rate.
5. Lease of property is a risky business.
Even if you, as the landlord, do everything correctly, you may still lose your investment. The tenant may cause major losses, or the economic downturn may cause you to lose rental income, which prevents you from repaying your mortgage.
COVID-19 is the perfect example for landlords to take risks. Due to widespread unemployment and eviction orders, many small landlords whose tenants were unable to pay rent eventually lost their leased property or cleared their savings for many years to keep.
6. You are responsible for maintenance.
As a landlord, you have Lease and maintenance responsibilities. This usually includes fixing the problem now (rather than later). If the stove in the middle of winter breaks, the tenants cannot be frozen.
Although you have the flexibility to transfer maintenance responsibilities to tenants, local laws usually impose restrictions. For example, you may require tenants to undertake tasks such as yard work or snow shoveling. Generally, you cannot make them responsible for solving habitability issues such as heating or hot water.
7. Be careful when screening tenants.
You may know that your tenant needs to conduct background checks and verify employment when applying for housing. You also need to understand the fair housing laws and similar regulations in the area.
For example, certain areas may prohibit tenants whose income comes from government assistance. Other jurisdictions may not allow the landlord to ask about the tenant’s criminal history in their application.
8. It is important to record everything.
When you find a tenant, make sure you have all the documents needed to evaluate and rent to the tenant and manage the property.Rocket Lawyer offers many options Customizable and electronically signable documents Meet every property management requirement. From lease applications and lease agreements to eviction notices, we provide you with everything you need to rent with confidence.If you have any questions about the property, documents or lease status, you can contact Rocket Lawyer on call® lawyer Affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm, nor is it a lawyer or a substitute for a law firm. The law is complex and changes frequently.Seek legal advice Ask a lawyer.