Top 5 Things to Consider Before Buying Rental Property

For first-time investors and experts alike, there are many crucial factors to consider when buying rental property to boost your real estate portfolio. From efficiently managing the costs of investing to maximizing your return on investment (ROI), here are 5 of the most important considerations to make the most of your investment.

1. Find the best locations to buy rental property

Finding the right location is just as important as choosing the property itself. Striking a mutually beneficial balance between securing capital gain and understanding what prospective tenants are looking for ensures that everyone is happier in the long run.

Some important considerations here include:

• Safety - Doing some research on the local crime statistics and the rise/fall of the rates of vandalism, theft, petty crime, and such will tell you if investing in a neighbourhood is more trouble than it’s worth.
• Amenities - A property located within a quality school zone will appeal greatly to families, and picking a property in close proximity to retail, eateries and public amenities like parks and public transport is a great low-effort way to secure a profitable rental income.
• Street appeal - Aesthetic value and attractive neighbourhoods can play a substantial role in a tenant’s decision, and drive further value that can offset rental expenses like renovation costs.

Though rental yields in capital cities are typically lower than in suburbs, factors such as employment opportunities and a greater abundance of amenities will ensure a regular influx of tenants.

2. Analyse the rental market and rental returns

When buying a rental property, the top consideration will always be how much potential income an investor stands to make, to ensure the highest rental yield possible.

A thorough analysis of the local rental market, together with a careful evaluation of ROI metrics, will help you estimate how much to spend on your property and how much rent to charge.

A few statistics to consider include:

• Average rent - A good baseline to start with is comparing the median weekly household income and the median weekly rent in the area to get an estimate of what you can expect.
• Determining rental price - A popular rule of thumb for investing in a property is that the monthly rental price should be around 1% of the total price of the property, to balance out rental expenses and increase your chances of a positive net profit.
• Vacancy rates - High vacancy rates are an indication of increased difficulty in attracting good tenants, which can incur additional costs like spending more to make your property stand out, or lowering your expected rent.
• Homeowner to renter ratio - If the majority of properties in a neighbourhood are owner-occupied, a rental property in the area may not generate enough interest to make your investment worth it.

3. Invest in property management

Though investing in a rental property is a great source of passive income, issues can crop up that take significant time and effort to resolve. Property owners are legally required to ensure that the property meets minimum living standards at all times, which can take more work than you think.

After they buy an investment property, more and more investors are turning towards hiring a property management company to look after their property.

A few of the expert services they provide include:

• Appraising your property and analyzing the rental market to ensure you get the best ROI
• Tenant screening
• Maintaining lease agreements
• Collecting rent and following up on arrears
• Conducting routine inspections
• Handling maintenance requests, and hiring outside tradespeople to carry out repairs
• Tenant coordination

Though paying the extra management fees can eat into your rental income, the all-inclusive model that most property managers offer can actually be more cost-effective and time-efficient. Investors should consider exactly how involved they want to be with managing the property, and outsource as required.

4. Find a tenant

Finding the ideal tenant for you will depend heavily on the type of rental property you want to invest in, its location, and how much you’re happy to spend on it.

For example, while a house in the suburbs is ideal for a family looking to settle down for a longer period of time, it will require a large initial investment.

Similarly, a property located close to a university will primarily attract students. Despite a high-volume tenant pool for the majority of the year, it will in turn affect your annual ROI during the off-peak months.

5. Timely property maintenance

The other key requirement for landlords is responding to maintenance requests from their tenants within a reasonable timeframe, to make sure the rental property is safe, fully functional, and wholly inhabitable.

But property maintenance isn’t just about putting out fires. Spending at least 50% of your rental income on maintenance and following these best practices will create both satisfied tenants and a well looked-after property:

• Taking preventative measures like making sure that utilities are functional, pest control is up to date, ensuring security systems, smoke alarms and appliances are all in working order, and so on.
• Regular routine inspections will help you assess the true condition of the property, and what repairs are needed.
• Save wisely! Consult your property manager or real estate agent to find out what maintenance and repair work is tax-deductible.
• Unexpected damage, urgent repairs, and wear and tear are all part and parcel of owning a rental unit. Invest in a good landlord insurance policy to cover you for property damage.