Buy and rent investing can be particularly lucrative for property owners in the current real estate market if due diligence is done on all costs and expenses before completing the final purchase. Rentals have remained a good investment as the demand for rental units has continued to grow, fueled by both the rising cost of properties and living which has increased by 14% in just the past three years.
Overall, the real estate space is more favorable than ever for rental real estate investing right now, and buy and rent investors are likely to receive a good return of investment. However, any real estate venture or investment, no matter how good the prospects, should always be considered carefully prior to getting started.
This is everything new landlords need to know about their first real estate investment:
Estimating The Numbers
Many real estate firms will purchase distressed properties with a goal capitalization rate of 5% to 7%, but individual rental investors should aim for closer to 10%. Along with this, the overall maintenance costs of a rental property should be estimated at about 1% of the property’s total annual value. These are not the only costs the buy and rent investor should expect, as associated costs with properties will also include expenses like insurance, property taxes and other monthly upkeep expenses such as landscaping or repairs.
To get a better sense of the net profit you can expect from a rental property, our simple investment property calculator can be very helpful.
It’s also important to note that landlords insurance should also be considered and added to the total estimated costs. The majority of comprehensive landlords insurance policies will cover a variety of events such as property damage, lost rental income and offer liability protection.
Personal or Professional Property Management?
Potential landlords and buy and rent investors should also consider the question of personally maintaining and managing the property versus having a property manager be in charge of the property. For individuals looking to maintain maximum profits, these extra services can eat into profits which is why many first-time investors will manage the property themselves. This is additionally why rental property owners will often do their own repairs, so building up some basic handyman skills might save some money in the long run!
But this changes as more and more properties are added to the landlord’s portfolio because it’s time-consuming and difficult to personally manage each one effectively. At that point as an investor, putting together a team of reliable cleaners, contractors and other handymen such as plumbers or electricians takes priority.
Upgrading Rental Properties
For landlords who are fixing and renting, adding an extra bedroom will increase the resell value of a property significantly and is one of the best upgrades that can be made to an existing property. An extra bedroom is also significantly less expensive than a kitchen remodel, and in many markets, another bedroom can actually have a more meaningful impact on the overall property value.
To get the best returns, setting your rental cost at the right price is essential. Your rental price should ultimately be attractive enough to draw in good tenants but still be enough to encapsulate all of the costs of maintenance.
Rental Income and Taxes
Rental income isn’t included in the landlord’s Social Security taxes, but the interest paid on investment properties is often tax-deductible, once the property has been declared under the right category. The majority of landlords have properties which are considered to function under passive business activity, in turn earning passive income.
Landlords can only deduct the expenses of the rental property from the money earned from owning the property. To file taxes on rental property landlords will use the IRS Schedule E: Supplemental Income and Loss form.
Rental real estate is a hot market right now and showing no signs of slowing down, and individuals getting started in the space can benefit from some due diligence and number crunching. Individual rental investors should aim to purchase properties with the potential to earn a healthy ROI of around 10%. Questions to answer will include whether to personally manage the property, if remodelling is necessary (and can add value) and finally which price to set the rental at so as to get good returns. The good news is that interest paid on investment properties is often tax-deductible for the landlord. Buy and rent investing is set to be a good investment for some time still to come.