You can afford to spend a lot of money on your primary residence as long as you love it and want it (in fact, this often happens in bidding wars). Your rental property, however, needs to make money for you; this means you should minimize the expenses as much as possible. Indeed, you need to know how much you will be getting from your rental property before buying it. This means you should know the following three things before investing in a rental property:
All Recurring Expenses
A typical property has recurring expenses that you can't escape. You need to know what these expenses are and how much they will cost you before investing in the property. Here are some of the expenses that fall in this category:
- Mortgage costs (assuming you bought the house on a mortgage)
- Property taxes
- Maintenance costs
- Utility costs
- Property management fees (if you won't be managing the property directly)
All Monthly Income
You should also calculate, as accurately as possible, the gross monthly income you expect to get from the property. Here are some reliable ways of doing this:
- Look at the tax returns from the previous years if the property isn't brand new and has been used as a rental property before
- Check the rental incomes from similar properties in the same neighborhood
- Consult a realtor for an approximation of what to expect
Once you have approximated the projected rental income, you then need to determine other sources of income from the same premises, such as income from vending machines, and add it to the projected rental income. That way, you have a rough idea of the total income to expect from the venture.
Approximate the Vacancy Rate
Don't make that mistake of assuming that your property will always have a tenant or will always bring in rent. There will be months when you won't get any rent, for example, if a tenant defaults. There will also be months when you don't get any rent because you don't have a tenant. For this, you need to consult a local real-estate professional who understands the strengths and weaknesses of the local property market and can get the data for an accurate projection of the vacancy rate.
Above are the most basic steps you need to take before investing in rental property. They will give you the data you need to determine whether you stand to make money from the rental property or it would be a waste of money.