When handled appropriately, investing in real estate is one of the most efficient ways to increase your net worth. However, it’s not as easy as simply throwing money toward an investment property and expecting massive returns.
To accurately predict the expected rental income of your property, there are certain factors you’ll need to keep in mind. Let’s explore what you need to know.
Always Consider Your Ongoing Expenses
One of the biggest mistakes people make when investing in rental property is failing to consider their ongoing expenses. As a landlord, you will be responsible for handling certain obligations that don’t come for free.
This includes general maintenance, making major repairs, groundskeeping, etc.
Although you shouldn’t have to spend an exorbitant amount on these responsibilities, you should assume that a maintenance issue will arise each year. This will help you budget properly and avoid any surprises.
Other ongoing expenses include obtaining the proper insurance coverage. This is crucial to take seriously, as certain incidents could ruin you financially if you aren’t insured.
For instance, someone not safeguarded by their insurance coverage may have to foot the bill while repairing flood damage.
Although this particular cost is often negligible compared to others, working with a property management company will also require you to allocate money. Be sure to consider this when moving forward.
Finally, you may have to hire a professional to prepare the property after your current tenants move out.
Add up all of these projected costs together to have a solid understanding of what you will consistently pay as time goes on.
What Is the Market Rent for Similar Homes?
In general, your rental rate will be determined by the rate of similar homes in your area. As you might guess, attempting to set your rate significantly higher will likely cause your home to remain vacant.
For this reason, it’s imperative that you properly research your local market. Be sure to consider multiple different factors, such as the overall square footage of the property, how many floors the house has, etc.
You can often get away with charging more for rent if your house has more to offer than homes of a similar size. For instance, your house may be located directly across the street from a popular restaurant or local school.
If you find that nobody is interested in renting, you may need to lower your rate to get more potential tenants slightly.
Be Aware That Vacancies May Occur
When people calculate their projected rental income, they often don’t account for vacancies. Unfortunately, each month that a house is empty will require you to handle all of the expenses on your own.
In some cases, this can drastically impact your return on investment.
It should come as no surprise that extended vacancies could turn a rental property into a financial burden instead of an asset.
Although you can take steps to minimize the number of vacancies you experience, they are sometimes unavoidable. So, it’s in your best interest to plan for them.
A general rule of thumb is to plan for at least one month of vacancy throughout the year. This will typically occur during the transition between old tenants and new tenants.
What Is the Current Condition of the Home?
The home you put up for rent might be in a great location and come with sizable square footage. However, you can’t expect to set your rent at the higher end of the local market range if the property is in poor condition.
Common issues include outdated hardware, cosmetic problems (such as chipped exterior paint), etc.
In this case, it is likely worth renovating the house to make it more presentable to your tenants. Not only will this help you find renters more quickly, but you can also get more money each month.
You May Need to Invest in Marketing
There’s a good chance that people won’t be lining up outside a home that you have just put up for rent. Unless you already have a presence in your local market, you will most likely need to invest in marketing.
This could include running online ads, creating flyers, and even working with a marketing professional to help get you on the right track. The more properties you own, the more money you should plan on investing in marketing.
This is simply due to the fact that managing multiple properties is far more difficult than trying to rent out a single house.
Don’t Forget About Taxes
Similar to how people neglect to consider vacancies, some landlords forget about taxes.
Money that you make from renting out your property is considered income. So, you’ll need to pay taxes on this amount the same as you would if that money had come from a more conventional job.
To have an accurate estimate of what you can expect to pay at different levels of rental income, it’s recommended to get in touch with a financial professional.
You can also visit this resource to help you get started.
Accurately Predicting Your Rental Income Might Seem Complicated
The good news is that it’s not nearly as difficult as you might think at first. The above guide will help ensure that you fully understand the expected rental income on your investment property before you take the plunge.
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