Five Tips to Successfully Invest in Rental Property
At a time when housing prices and rental costs in Australia are on the boil, rental investing has emerged as a lucrative business opportunity for property investors. Meanwhile, the record low interest rates prevailing in the nation have made rental investing more attractive even in the eyes of the most seasoned investors.
One cannot neglect that rental property investment is a great way to add to your monthly income and boost your current investment portfolio. If you make the right choice in selecting a rental property, you can easily enjoy a long-term investment turnaround and consistent cash flow.
However, rental property has its own share of risks and areas of concern that novice investors may not be privy to. Rental investing can turn into a complete nightmare if investors get into this business without proper fundamental research and due diligence.
On that note, here is a list of five tips that can help investors reap the rewards of rental investing and dodge potential losses:
1. Establish a Long-Term Plan
Investors interested in purchasing rental properties should formulate a long-term plan in a way that their return expectations and risk profile are in line with their individual goals. These goals should be realistic, achievable and match their financial capability. While working in accordance with the long-term plan, investors can weigh the return on different rental setups against the costs attached to them.
To formulate a long-term investing plan, investors should determine the amount they are willing to invest in a rental property and the number of rentals they plan to own beforehand. It is equally important to evaluate the amount of income the rental property will produce to determine the property’s viability. Towards this end, investors can use the 1% rule, which tells that the gross yearly rental income should be at least equal to 1% of the purchase price.
2. Cover Any Unresolved Debt
In succession to the first tip, maintaining a debt-free portfolio can help rental investors achieve their financial goals faster. Especially, investors who are entering the property market for the very first time should avoid going in with a set of liabilities on their shoulders.
While paying down existing debt, investors after owning the rental property can also create buffers for situations like unexpected vacancies, emergency maintenance fees and non-payment of rent by tenants.
In fact, doing away with debts like student loans, credit cards bill, or any unpaid expenses is the first order of business in financial accounting. Individuals become better placed to achieve their financial goals once they are debt-free.
3. Pick Between Paying Cash and Leveraging
While some investors prefer buying the property through a mortgage, few real estate investors recommend going for rental property only if they have the cash to go ahead with it. However, not many investors are actually able to pay cash for an investment property, particularly the one located in a respectable and developed area. Besides, it clearly depends on a person’s individual wants and needs and what makes the best sense to them as an investor.
Having said that, the current circumstances seem to be ruling in favour of leverage to buy rental properties. With record-low interest rates, investors have a rewarding opportunity to buy property without weighing heavily on their pockets. In the current situation, investors appear well-positioned to make profitable returns in the form of rental income against low-interest payments. However, investors need not neglect the inherent risks associated with mortgages and prepare themselves accordingly.
4. Take Heed of Landlord Duties
Renting out their own property and becoming the decision-makers can be exciting for certain investors. However, these perks benefit the investor only if he is an enlightened and active landlord.
When individuals plan to become landlords, they do not initially realise how much work goes into the same. Doing necessary background checks on the tenants, ensuring essential documents are presented and signed by them and collecting rent on time are some of the additional duties that arise after becoming a landlord. Unfortunately, not every landowner has the time or inclination to fulfil these duties. Besides, some of these tasks can be hard to execute as they may even involve evicting tenants for untimely payments.
With that said, landowners must ponder on whether they have the skill and time to manage a rental or need a third party to carry out such duties. Those willing to sacrifice a part of their profits can hire a management service to perform these tasks.
5. Choose the Location Wisely
Part of making a rental property decision is analysing where to buy the land. It is one of the integral aspects determining the investor’s future growth stream. Thus, paying some extra attention to location can deliver substantial gains to investors over the long run.
While choosing a location, investors can consider factors like low property taxes, transport connectivity, infrastructure facilities, and proximity to nearest parks and malls. Additionally, investors should seek real estate deals in locations with high rental demand to succeed in their rental property business.
Renting out a property may not be as Herculean of a task as one might think. With proper management and correct knowledge, even novice investors can look at stable returns within a few years’ time. However, it is always better to be well-versed with the risks and rewards of owning an investment property before making a decision.
Mr. Kunal Sawhney
CEO, Kalkine Group