How To Buy Rental Property To Help Insure You Make a Profit
Real estate investors have been making money for years investing in rental property. So what’s the allure of rental property and what can you do to help insure that any investment you make when you buy rental property results in a profit?
For starters, let’s understand what rental property is.
Rental property is real estate that includes one or more family units such as a single-family house, duplex, or apartment complex. In other words, any-size real estate held for the purpose of generating income from rents are in fact deemed rental property.
The main benefit of investing in rental properties is that they are capable of producing an income stream from rents that enable real estate investors to support the debt. This real estate investing concept (otherwise known as "using other people's money") is what entices investors and drives most investment real estate decisions.
Consequently, how much income a rental property generates compared to the mortgage payment and other obligations required to purchase the property are what insure a profitable real estate investment.
In this article we’ll discuss four real estate investing essentials you can incorporate to help impart that principal and perhaps to make more profitable real estate investing decisions.
Obtain Sound Financing
Foremost, you do not want to make an investment in rental property encumbered with a loan that places an outrageous financial load on either yourself or the property. To help insure a profitable investment you need to obtain sound financing.
Fair enough, but bear in mind that loan companies structure financing in line with the investment property's potential income stream and financial strength. So you are always apt to negotiate a more favorable loan-to-value and interest rate when you present the bank with adequate and accurate projections regarding the rental property’s cash flows and earnings potential.
This is routinely accomplished with real estate analysis reports created by real estate investment software or other sources available to the real estate investor.
Survey the Rental Market
Secondly, you must carefully gauge the rents and vacancy rates in your local area by conducting a survey of the rental market. After all, your real estate investment wholly depends on the amount of rent tenants are willing to pay to occupy your property. So watch carefully for vacancy and rental rate trends in nearby neighborhoods.
Should you discover low vacancy levels surrounding the property, it might indicate a shortage of units and could be sign of an impending upswing in rents. This would mean that the rental property has the potential to add value to your investment and could be a smart real estate investing choice.
On the other hand, if your survey reveals an abundance of vacancies surrounding the rental, it could be an indication that tenants will be scarce and that you may have to resort to lower rents in desperation to attract tenants from your competition. This, of course, would add a huge element of risk to profitability and might not be your best real estate investing choice.
Look for Upgrade Opportunities
Thirdly, pay close attention to whether the rental property offers you an opportunity to contribute to profit with upgrades that could result in higher rents. Money is routinely made by real estate investors, for instance, when investment properties are in need of repair and have lower rents.
In this case, consider both the neighborhood and the remodeling costs jointly when making your investment decision.
If the real estate is located in a good neighborhood (or perhaps one turning around for the better) and remodeling costs could be offset with a positive impact on vacancy or rents, then purchasing a “fixer” rental property can provide you with a profitable investment opportunity and smart real estate investing choice.
Validate the Numbers
Finally, be sure to validate all the numbers regarding the property’s financial performance by conducting your own real estate analysis. It is never wise for any real estate investor simply to accept the cash flow, rate of return, and profitability projections presented by owners or agents who are trying to sell rental property.
This is not difficult with real estate investment software. So consider making the investment in a software solution that creates a real estate analysis for you to validate the numbers on rental property to determine its profitability. It just makes good real estate investing sense for you to cover all the bases.
About the Author
James Kobzeff is a real estate professional and the owner/developer of ProAPOD - leading real estate investment software solutions since 2000. Create cash flow, rates of return, and profitability analysis on rental property at your fingertips in minutes! Learn more at www.proapod.com
ProAPOD also provides an online real estate calculator that enables you to learn dozens of real estate definitions and formulas as you calculate. You save 64%. Learn more at real estate calculator
- How To Calculate Cash on Cash Return | The Method And Formula!
The formula and calculation for cash on cash return. Insights in how to use it in your next real estate analysis.
- How Risk Analysis is Used to Make Better Real Estate...
What risk analysis is and how real estate investors use it in a real estate analysis to make investment decisions.
- The Present Value of a Future Cash Flow - Why Unders...
Learn the difference between present value and future value and why these time value of money concepts are crucial to your cash flow analysis of investment real estate.
- How to Compute Rental Property Improvement Budgets t...
Learn how to calculate a rental property improvement limit according to your desired rate of return.
- Time Value of Money: How It Impacts Rental Property ...
Many experience the effect of time value money but have no understanding. Learn about this important concept and see why real estate investors use it to measure cash flows and rates of return.