What To Consider Before Buying A PropertyJanuary 05, 2018
There are several things that you will need to take into consider before purchasing a property. This includes the amount of money that you expect to bring in each month, the annual expenses and the risks that are associated with buying property.
Expected Income From The Rental Property
When you are looking for a property, you will need to determine what a reasonable monthly rate is. The quality of the property and the location are some of the things that you should take into consideration when you are determining a reasonable rent to charge each month.
For example, you purchase a house for $100,000. You do your research and find out that the average rent for this property is 500 per month. You will receive $6,000 per year per tenant. This is a 6 percent return on investment. The next thing that you will have to take into consideration is the expenses that you will incur.
Yearly Costs of Owning a Rental Property
There are two types of expenses. There are fixed costs and variable costs.
Fixed costs do not change from month to month. This includes things like routine maintenance, property taxes and insurance. Property management services can also be considered a fixed expense.
Variable costs can vary from month to month. You will have to set aside money for variable costs. This includes things such as replacing an air conditioner, water heater, flooring, plumbing, fencing and heater.
You will need to calculate how much you will have to pay for things like insurance, routine maintenance and property taxes. You expect to spend $1,000 per month based on your calculations. You will need to put aside an extra $1,000 to pay for unexpected expenses.
Keep in mind that the expenses that you incur will reduce the net return on your property. For example, if you are bringing in $6,000 per year per person, then you will have to subtract the $2,000. Your actual return will only be 4 percent.
This calculation is based on the assumption that your property will have a tenant all year long. If you have a bad renter, then this will reduce the amount of money that you bring in.
Risks of Buying Property
Before you buy a property, you will need to take several risks into consideration. There is a possibility that your property could be vacant for months, which can cause you to lose money. You may have to evict a bad tenant. For example, if you have a tenant that does not consistently pay rent, then your best option may be to evict them.
You may also have to evict a tenant that does damage to the property or does not keep it clean. While eviction can be the best thing to do if you have a bad tenant, this can be costly. There are legal fees that you will have to pay if you attempt to evict a tenant. Additionally, you will be responsible for paying for any damages that the tenant does to the property.
You can reduce these risk by hiring a quality property management firm. They can help ensure that you attract high-quality tenants. You will have to pay to hire a property management firm. They will typically charge you about 10 percent of your monthly rent.
There are many benefits that are associated with buying a rental property. Not only will you get a stable source of income, but owning a property can be very lucrative. It is important for you to know what you are getting into before you decide to purchase a property.
If you are interested in real estate, then it is a good idea to read a book called "How To Get Real Estate." This book was written by John T. Reed. Many of the books about real estate promise you that you will get rich quick. John Reed's book offers you practical advice that you will be able to use.
It is also a good idea to talk to a certified public accountant. They will be able to give you advice on what you can and cannot do. They can also give you a list of pros and cons.
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