Buying an apartment or house to let out to tenants is a fantastic way to get a solid return on your investment. You likely already have an idea of what to look for when buying an apartment, but you might not be so familiar with rental property. Let's take a look at some of the things to consider.
It’s a well-worn phrase (in fact we’ve said it here before), but the most important thing when looking for a property is: location, location, location. But this time, you’re not necessarily looking for a location that you yourself would ordinarily choose, but what makes the most sense from a tenant’s point of view. You may prefer a quieter area, but a street in a busy neighbourhood is more likely to attract tenants quickly.
At the same time, this needs to be a sound financial decision. Find out as much about the local market as you can. Have property values increased, stayed the same, or decreased over the past year? Over the past five years? What is the typical rent for the area? Do your research beforehand and make sure that the property is in a popular area.
Finding out the details of the local property market is just one of the financial considerations you will have to take into account. You will also have to consider:
- Sales commission (though all EverEstate’s investment properties are commission-free)
- Closing costs, such as notary costs and property transfer tax
- Mortgage costs
- Rental income
- Operating costs, such as maintenance retainers and administration costs
These are all factors which should influence your decision. Yet there are also a number of tax benefits to be derived from rental property. You can deduct any rental expenses – such as mortgage insurance, property taxes, repair and maintenance expenses, professional services and travel expenses related to management – from any rental income you earn.
Another key tax deduction is depreciation. Essentially, the authorities assume that rental property buildings wear out over time and therefore become less valuable. As a result, property owners are permitted to take a tax deduction for that presumed decline in the form of a depreciation allowance, at 2% of acquisition costs over a 50-year period. Properties built prior to 1925 are excluded, as are historically-protected buildings.
Investing in rental property is a long-term investment, and it’s vitally important to do your calculations before buying the property. There are many resources around which can help you with these calculations (such as our very own return calculator).
There are still plenty of risks associated with buying and owning rental property, however. You may have to deal with your property sitting empty without any tenants, or you could incur costs from bad tenants. Buying a property which is already rented is more efficient in terms of rental income, as you begin earning rent from the very first day you own the property. It also means that the details of the apartment and the existing rental contract are direct and up-to-date, enabling you to make a more reliable estimation of the future financial performance. Additionally, you may wish to employ a property management firm, which can be invaluable in helping you to find tenants and assess them, particularly if you do not live in the same city, or even country, as your property.
With all of these things in mind, you should assess your current situation to see if buying investment property makes sense for you now. Can you make a sizable purchase like this and still cover your existing financial obligations? If any repairs are required, do you have the money to pay for those repairs and the costs to carry the mortgage until you’re able to rent it? Does this have the potential to provide a better return when compared with other investments?
You can also check out some of our other articles, like this one on an insider's guide to buying an apartment, for more information.