Buying a house to use as a rental can be a profitable investment. Even if you and your spouse are still renting yourselves, it's possible for your first purchase to be an investment property instead of your primary residence. Some people buy rentals before their own homes because the investment might be in a more affordable area that isn't conveniently located near their jobs and other activities. Purchasing a rental property requires research and serious consideration of some important issues.
Location Considerations
The location of the rental is vital when determining the amount of profit you can earn. With investment property, you must consider a wide range of interests when choosing where you'll buy. Price is a factor, but so are other considerations, such as distance to schools and universities, bus stops, commerce, neighborhood amenities and freeways. When buying a property for yourself, you can have more flexibility on the location. As an investor, you must consider the ease of renting, and eventually selling, the property when picking the location.
Rental Income
When seeking to make a profit on an investment property, you need to know the estimated rent you can charge. Look for other comparable rentals in the immediate area. You can find listings in your local paper or online at sites such as Realtor.com. Call landlords to inquire about deposits, pet fees, utilities paid and other questions. To achieve an accurate comparison, drive by and look inside, if possible. Try to find houses with the same number of bedrooms, bathrooms and amenities. Review the most recent vacancy rates for the closest metropolitan area on the U.S. Census Bureau site to approximate how many months per year you might not collect rent.
Standard Expenses
Buying a house for profit means that you must calculate your estimated net income from the investment before you make a purchase. Some standard expenses of owning a rental property include make-ready repairs and cleaning, property taxes, hazard insurance premiums, management fees, utilities and trash, homeowner association dues, gardener and repairs. Add all of your anticipated expenses for the month and subtract the total from the amount of rent you will charge. The difference between these two figures tells you how much you can afford for the purchase price and mortgage so that you don't buy a rental that consistently loses money.
Mortgage Payments
Because your goal is to make a profit from renting the house, you should keep your mortgage payments as low as possible. With investment properties, you will find favorable loan terms, and avoid paying private mortgage insurance, by placing a down payment of at least 20 percent on the house. Having a good credit history and score, such as 740 or higher, helps you qualify for the lowest interest rate. If you must borrow the down payment from an asset you own, such as another property or someone you know, add that payment to your mortgage expense, so you can accurately calculate your profit.
