What should I consider in a rental investment?
Owning a rental property can be a lucrative investment. First, there is the idea of renters paying off your property with their money. Then, in this day in age of relatively low interest rates, the average annual return of over 9 percent from residential rental property in the U.S., according to RealtyTrac in October 2014*, is certainly tempting.
But before you jump in, there is a lot to consider—and more than just “What kind of rent can I get?”
- Will you active manage your property or use an agency to manage it for you? This is largely a consideration of time and convenience. If you choose to manage your own rental, be prepared to be an impromptu plumber, carpenter, and all around handyman—complete with late-night phone calls when the HVAC breaks or sink is clogged. You’ll also have to handle the marketing, paperwork and rent collection yourself. In this case, you’ll probably want to get a property located nearby. If you plan to use a property management agency, your rental can be a little further away—but thid convenience comes at a cost.
- What are your associated costs? Make sure you consider ALL the costs. Consider property taxes and insurance. Does the neighborhood have any HOA fees? Who is going to cover utilities: you or your tenant? Also make sure you also leave margin for error. What if you have to replace the HVAC or put on a new roof? What if the property sits vacant for a few months? Calculate how long it would take you to recover those costs and earn a profit again.
- What is the location like? It’s important to look beyond whether the property is located in a good neighborhood. Look at the local school district and neighborhood amenities. How far is it from parks, stores and the central business district? Also consider any current and future developments in the area. If it’s a high-growth area, it usually means your investment will be more secure.
- What are your opportunity costs? In a world of unlimited resources, this wouldn’t be a problem. But, alas, most of us don’t have “infinity” listed as our bank account balance. Before investing in a rental property, consider the potential gain you could be missing out on from investing your money in another opportunity. If you don’t buy a rental property, what are your other investment options? How does the potential return compare?
Again, there is a lot to consider before investing in a rental property, but in a growing area like Greenville, South Carolina, there is also potential for great reward.