One of the most important things an investor needs before buying a single-family rental property is an accurately calculated rental rate. But determining the fair market rental rate for a rental property can sometimes be a challenge. Rental rates vary from place to place and often fluctuate over time. In especially volatile markets, rates could be very high one month and then drop at the first sign of an economic downturn. To avoid losing money on your investment property, it is important to look for a rental property with consistent rental rates over time.
Rental Property Analysis
Analyzing a potential rental property to buy can be a lot of work. There are many factors to consider and a wealth of data to collect. Among the most important pieces of information you’ll need is to determine the expected fair market rental rate. A fair market rental rate is one term for the going rate for rental properties in a given area. To determine this rental rate for a new rental property, you’ll need to know what the landlords of comparable properties in the neighborhood are charging for their rental homes. This will require some local research, calling any listings or classified ads you find and a few property management companies in order to collect a range of rental rates on both vacant and leased properties.
Of course, an accurate rental rate will also need to consider a few additional aspects of the property itself. For example, what type of parking will be included? Are you planning to offer any additional amenities, such as Wi-Fi or cable? Are there extra community features, like a swimming pool or large parks, that might make the property more desirable? Will you allow pets and/or charge a pet rental fee? And what, if any, furnishings and appliances will be included? Each of the features and extras you plan to provide will potentially add to the optimal rental rate for a particular rental property.
As you collect the information you need to determine an accurate rental rate, it is important to keep an eye out for possible red flags. For example, if the current rental rates in the neighborhood seem unusually high, that could signal an issue with rent inflation. Especially if the rents have gone up significantly in the last year, this could be a warning sign that the local rental market is unusually volatile and subject to large fluctuations. Buying such a rental is not a good idea because it can make it difficult to plan with any confidence for future costs and improvements. On the other hand, properties with high rents may have already maxed out the market potential, leaving little room for rent increases in the future. If you are unable to increase rental income to keep pace with inflation, chances are in just a few years your investment property will start to lose money.
Consistent Rental Rates
The properties that make the best investments tend to have consistent rental rates along with consistent rental rate increases year after year. This type of property makes an excellent choice for investors because the risk of a sudden drop in the market is low, while the future potential of the property is strong and steady. With reliable rental rates, an investor can more confidently plan for the property’s physical and financial future. Not only will consistent rents help you budget for future improvements and repairs, but also ensure that your rental property is a significant part of your continued financial success. For more information about how to find properties with consistent rental rates, contact your local Real Property Management office today.
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