Profitability Versus Inconvenience
New landlords are prone to making the same mistake as their predecessors: they purchase properties for the purpose of renting without properly evaluating whether those areas will be profitable or not. While a mountain cabin next to a beautiful lake may earn some money during the peak seasons, the trouble of maintaining it the rest of the year can negate any upsides. Here’s how to determine whether a property will be profitable or not.
1. Evaluate the surrounding area
The area of the property determines its profitability. Is it a good neighborhood with lots of restaurants and entertainment options? If so, you can charge a premium for it. If not,you may find yourself struggling to rent it. For example, a property on the beach may be popular during seasonal periods, but not so much the rest of the year. This means you would need to charge higher rent to cover its vacant period, which makes renting even more difficult.
2. Research average rentals in the area
Check out the other properties in the area. Pose as a renter looking for a place to live, if necessary. Find out what other landlords are charging for similar properties, and base your estimated rent on that amount. You may need to adjust this starting estimate up or down, depending on a number of factors. Any obvious advantages your home has over the comparable homes may warrant a rent increase, for example. Likewise, smaller square footage or lack of an amenity might require a lower rate.
3. Stay away from high crime areas
If the property is in an area – or close to one – where crime is a frequent problem, you won’t be able to charge a high price for it. And if crime really is that much of a problem, maintenance can be a serious issue. Properties near crime hot spots are usually not worth your investment.
4. Consider the property tax
As the landlord, you’ll be in charge of paying property tax on your rentals. If your property is in an area with a high tax rate, you’ll want to ensure renters are willing to pay the rate necessary to cover tax expenses. Having long-term tenants can help cushion the blow and safeguard against vacant periods, but nothing is guaranteed.
5. How Property Management Companies Help
Let’s assume you want the rental to be as hands-off as possible. Placing the property in the care of a property management company can help. A good property management company will find renters, handle payments, and more. However, these companies also charge a fee, so you’ll need to adjust rent prices accordingly. However, if you own multiple properties within a small area, a property management company can perform inspections and ensure they are well maintained––a service that is often well worth the cost.
To find a good property management company, speak to other landlords in the area. Ask for recommendations, but pay attention to reviews. Find a company that will do the job properly for a fair price.
It can be difficult to take care of your day-to-day tasks in your own home, even without the stress of a rental property. With that in mind, you need to make sure the money you'll save managing the property yourself is worth your time. When it comes to rental fees, charge a fair price, but don’t sell yourself short. Before investing in a potential rental property, take the time to evaluate the area and find out if it’s a profitable option or not.
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