Buying a Second Property to Rent
Buying a property to rent is one of the most lucrative investment options available and one that will provide a stable income for years. Since the recession property prices have decreased in dozens of countries around the world and savvy investors have been quick to take advantage of this. Rent prices have not declined and in many places they continue to rise as fewer people are buying property. In this context we take a look at initial steps in investment decisions and then look at how to choose the most suitable property.
Investment Preparation
To invest in property you do need capital but you aren’t necessarily going to be able to buy a house outright. This means that you will need some form of mortgage and preferably one that leaves you with a healthy margin for profits. To analyse this information we need to look at 4 key factors
1. Property Price
2. Mortgage rates
3. Rental Price
4. Tax and other maintenance expenses
5. Property value expectations
If we contrast these figures we will have a good understanding of the income potential of a given property and the amount of money it will cost us in total. Using a home loan repayment calculator we can work out the total cost of our mortgage and our monthly repayments. We can then subtract this figure from our projected rent to have an estimate of our monthly profit. It is a good idea to factor in a leeway of 10% for maintenance costs and then deduct taxes. This way you will have a full understanding of your property income. Finally you can estimate the increases in the property prices by looking at the history of the market and the rate of inflation; which will determine the likely increases in value.
Choosing a Property
To ensure that you manage to maintain profits from a second property you will need to ensure you hold tenants for as long as possible. Whilst there are no guarantees in this area there are a number of factors worth considering. Firstly, you need to evaluate the property size to analyse what kind of tenants you are likely to attract – big houses – families, flats – single professionals etc. This will give you some idea of your target market. With that in mind you want to look at the following characteristics of the area around the property:
- Proximity to amenities (shops, schools etc.)
- Access to jobs
- Crime
- Occupancy rates in the area
- Average rental prices in the area
This information will give you a good indication of whether a particular property will see consistent rental or whether it will be difficult for you to find tenants. Young families will look for areas in close proximity to amenities and with low crime rates whilst young professionals will be more interested in access to jobs and entertainments. Occupancy rates and average rental prices will give you a good indication of how quickly you will find an occupant and what prices people in the area will expect to pay; if you buy a mansion in the middle of an area dominated by cheap flats you are unlikely to rent it.
By paying attention to these factors you can ensure that your ROI remains high for a property purchase and that you get good value from your investment.