Tips for making a real estate investment for the purpose of renting

Although there are many ways to invest directly in real estate, we had said in our article last week that there are basically two major investment approaches: investing in a property to sell it or investing in a long-term property to rent it out. This time we will talk about the second investment approach.

One of the benefits of investing in a rental property is that you have the possibility of obtaining two types of returns. First, you can have an asset of long-term value, if the cost of the property increases over time and if improvements are made to the property. Second, the owner can also potentially make an ongoing profit as positive cash flow.

If a decision is made to purchase a rental property to earn positive cash flow in an appreciating market, the investor must be willing to take responsibility for managing the property or working with a property management company. You must consider between one option or another the net income based on all the fixed costs that the property entails. Of course, like any investment, it is important to understand that investing in rental properties carries the risk of loss and no return on collateral.

Considerations before investing in a property

We had said that owning a rental property qualifies as a business if you know how to make a good profit from it. However, for it to be a potentially safe investment, some aspects must be taken into consideration such as:

  • - The type of rented property (residential or vacation property)
  • - The number of properties you want to rent
  • - The participation that the owner or real estate agents will have
  • - The types of services provided under the lease
  • - The terms of the lease (for example, a short-term lease versus a long-term lease)
  • - If the owner must fully or partially bear the costs for service and maintenance of the property.

So can we make a good investment if we buy a property to rent? With a real estate investment of this type you can obtain between 3% and 8% profit on the investment depending on the type of rental. If our investment is designed for a vacation rental, logically more can be earned; unlike a long term rental, where you will surely earn a little less.

In order to have a planning of the cost that the rental of the property will have, we must start with the purchase of the property. If you have the property, the rent is calculated based on the purchase price. If you do not already have the property, you should do a preventive study to find out how much you can rent. For this it is necessary to go to expert professionals who can indicate the rental price.

What is the cost to invest in a rental property

For example, if we buy a property we have to take into account the fixed costs involved in the investment. You can continue reading more about this topic in tips to keep in mind when making a real estate investment.

When it comes to a vacation rental, it must be taken into account that many of the service and maintenance costs are borne by the owner of the property and not by the tenant. In this sense, it will be necessary to have a list of services to pay such as electricity, community, among others, to be considered in the cost in rental price that the house will have in the determined modality (daily or weekly rent).

Here are some questions to ask before making the decision to buy rental property.

Location matters

Remember that it is easier to locate a property that has access to services. It is advisable to invest in areas close to cities or towns. If it is a vacation rental, in the tourist area of ​​Tenerife, for example, it is very common to have this type of rental due to the high number of tourists. For this market, Remax Golden Mile has a specialized department dedicated to vacation rentals, ready to provide advice to clients who need to locate their property in the market.

Consider the financial impact

How much money do you have available to make a down payment or even pay the house in full? Do not forget to calculate the approximate return you will have on the investment before buying a property. Calculate how much income you will get from the property and what will be the expenses that you will have to assume before and after the purchase. Subtract these expenses from your gross income to find your net operating income.

Among the costs that you should consider you should include:

  • Fees for the purchase of property
  • Utilities
  • Advertising
  • Cleaning, maintenance and repairs
  • Professional fees (management of real estate agents)
  • Taxes

Another recommendation that we give you is that you must know the laws in force. For example, certain communities require a grace period when your tenant is behind on rent, if it is a long-term rental. In other words, a tenant cannot be evicted until the end of this period, but late fees can be charged.

Determine a plan if you can't rent

You will not always be able to rent your property. You may have trouble finding tenants on occasion. A family member may need a free place to stay for a few months, etc. In other words, there may be a number of reasons why you are not receiving income from your property. How will that affect your financial situation? Consider carefully what the implications will be whether or not you really need to have the steady cash flow that the property provides.