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3 Things You Must Know Before You Buy Rental Property

Expected Risks And Returns Of Investing In Rental Property

Before you buy a rental property, consider three things: the expected amount of rental income, the annual expenses you will incur, and the risks that may come along.

1. Expected Amount Of Rental Property Income

Before you buy a rental property, find out how much rent is reasonable to expect given the location and quality of the property.

Example:

Let’s say you buy a house for $100,000.
Through research you learn the average rent for that type of property in that location is $500 per month.
You can then calculate that you will receive $6,000 a year($500 x 12 = $6,000), or a 6% gross return.

Next, you must consider the expenses you will incur as a property owner.

2. Annual Expenses Of Owning Rental Property

Fixed Expenses:You will have reoccurring expenses such as annual property taxes, insurance, routine maintenance and repair items, and the cost of any property management services.

Variable Expenses:Don’t forget to set aside funds for major expenses such as replacing the water heater, air conditioner or heater, roof, fencing, flooring or plumbing.

Continuing the example above, assume you calculate that property taxes, insurance and routine maintenance will cost about $1,000 per year. You also plan to set aside an additional $1,000 a year into an account that will pay for any major repairs.

Your actual return (net return) on your rental property is now $4,000 per year ($6,000 in annual rent minus $2,000 in annual expenses), or 4%. That calculation assumes your property stays rented on a continuous basis. You must factor in risks like not being able to find a quality renter.

3. Risks Of Buying Rental Property

Before you buy rental property, consider the following risks:

Your property could sit empty between renters, lowering your overall return.
You could incur legal expenses should you need to evict a bad tenant.
You could incur excess repair costs should a bad tenant cause damage to the property.

A qualified property management firm will help reduce risks, as they have the experience necessary to find high quality tenants.

By Dana Anspach

Since 1946 the Carnahan name has had a reputation for honest and ethical Real Estate Property Management services in the San Fernando Valley, Santa Clarita Valley, Burbank/Glendale, Los Angeles, Westside and Conejo Valley areas.

The reason for our success is helping owners like you when they need it. Below is a partial list of property management services we provide to help you protect your real estate investment.