Investment Properties: The Basics
An investment property can be:
- a property purchased for the purpose of creating a profit through the future resale
- through earning a return on investment through leasing the property out
- or both of these
For the purpose of this post we are going to focus on a rental property that is purchased for the purpose of receiving a rental income.
One of the most important things to consider when looking for a rental property is the location. Location can have a huge impact on the amount of rent you can charge. For instance, if you have similar houses but one is in a better school district, or walking distance to schools, you can expect a higher rent. This in turn will lead to a better cap rate. It is also important to take into consideration how close the house is to local amenities that could attract potential renters such as grocery stores, gyms, community centers, movie theaters, shopping, etc. It is important to decide who your target renter is and look to purchase in an area that would appeal to that target demographic.
The capitalization rate, or cap rate for short, is used to indicate the rate of return that is expected on an investment in real estate. In order to determine a properties cap rate, divide the Net Operating Income by the Current Market Value. To determine the net operating income of the property, take the expected gross rental income and subtract all the operating expenses from it (such as insurance, property taxes, any utility bills not covered by the tenant, etc). Generally, a cap rate of 5-7% is considered reasonable. That said, if you have a competent realtor, you could find rental properties with a cap rate of 8% or higher – more than likely a great investment!
Other Things To Consider
Having an income property is a great way to build your investment portfolio and gain equity in a property/increase cash flow. However, it isn’t always as easy as sitting back and collecting a pay check. Before you enter into the investment property market you should ensure you are comfortable enough financially to maintain mortgage payments and upkeep on the property whilevacancies happen. It is also important to get the right tenants into your property to try and ensure you will get paid the rent you are owed and your place will be properly looked after. There are many rules and responsibilities of being a landlord and you should ensure that you know what you are getting into. Working with a realtor from start to finish on these investment properties can help ensure things go smoothly. A knowledgable realtor knows the Residential Tenancies Act and can help you understand your rights, responsibilities, and guide you through any sticky situations that may arise.