Investing in a rental property is a sure-fire way to hedge against inflation and create a steady cash flow. However, it is riddled with responsibilities, drawbacks and even potential pitfalls. Here’s what you need to know about the economics of owning a rental property.
Investment Initial Cost
The first step in ensuring a lucrative attempt at rental property investment is to buy a reasonably priced property. When buying a property, it’s important not to pay more than 12 times the annual rent you are expecting to get. How is the potential rent determined? This is where local knowledge and research come into play. Ideally, you should buy a good property in an equally good neighbourhood. You can find a Sydney house and land package hereto consider or use as a reference.
You should start following the rental market for some time and know the general price range for the size of the unit you want to rent out. Add in factors such as a nice view, proximity to schools and nearby public transit. It is also vital to not be carried away with positive assumptions; setting rent too high and ending up with an unoccupied unit for several months will chip away at the overall profit quickly.
Buying a property
Banks typically have significantly harder demands when giving loans for an investment property than homes purchased as a person's primary residence. This is because people are less disposed to give up and walk away from their home when times get tough. You need to pay at least 20 to 30% for a down payment as well as the usual closing costs. It’s also necessary to have the property systematically checked by a professional and to have a lawyer assess everything before signing.
The cost of ongoing upkeep will depend on the age of the property, your tenants and how much upgrade you plan to do yourself. Newer buildings do not involve a lot of remodelling and fixing occasional broken electrical outlets, while an older property will have more small stuff breaking with expensive items such as roof replacements as well as major plumbing updates.
In view of this, it’s oftentimes better to purchase a new property rather than invest in a second-hand home.
The type of tenant will also directly impact the number of repairs necessary. An apartment complex for seniors, for instance, is unlikely to be exposed to the same amount of damage as a residential house turned frat house for college boys.
Doing your own repairs will cut down the cost significantly, but it also means being on call 24/7 for any repair emergencies. Of course, you can hire a property management firm. The management firm will handle everything from clogged toilets to collecting rent monthly but it comes at a price; you may pay about 10% of your gross rental income for this service.
Insurance, Taxes and Local Expenses
Tenant insurance covers a tenant's belongings. The property itself is the landlord's responsibility, an insurance may be more expensive than a similar owner-occupied home. The rental mortgage, insurance and some amount of depreciation are all tax deductible. Make sure to research local rules and ordinances.
There you have it! Don’t hesitate to contact a property expert to assist you when looking for a property in your preferred neighbourhood.