How to Evaluate Rental Property
Many people overlook real estate as an option when they consider ways to invest their money, opting instead for stocks, bonds or bank deposits. But if you go about investing in real estate in the right way, it can be lucrative. The process takes a certain amount of discipline, but if you follow these rules, you'll be glad you made that step toward financial security.
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Instructions
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Set your goals before you make your first real estate investment. For example, do you intend to find distressed real estate, fix it up, then sell it at a profit? Or do you look at real estate as a long-time investment, where you will make rental income and then a profit from selling after it appreciates in price? By setting goals, you will establish guidelines for making purchases.
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Evaluate the market. There are some times when investing in real estate is not for the faint of heart, when a run-up in prices means there are no bargains. At such times, you would be smart to keep your money in a safe place. There are other times, however, when real estate is undervalued, and there are deals galore. As a rule of thumb, consider property that you can buy for about 20 percent less that it has cost in the recent past. Complete your analysis before you make a real estate investment.
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Do the math. Most people invest in real estate to generate income and look forward to capital appreciation when they sell it. First, look at making money when you sell real estate as gravy, because it is impossible to determine the market's actions in the future. Instead, make sure that the property that you purchase will generate current income. Estimate rental income by looking at rentals for units of the same quality in the neighborhood where the property is located. For planning purposes, assume that you will receive about 10 rental payments during the year.
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Factor in maintenance, taxes, condo fees and depreciation at 4 percent of the value of the property, minus the land, which you can deduct on your federal return. One percent of the purchase price is what you might estimate for maintenance per year for most rental properties in good condition. If after deducting those items from rental income and allowing for the impact of the property on your income taxes, you make a significant profit, that piece of property should be considered.
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Decide on the management of the property. When they start out, many investors opt to collect the rent and take responsibility if the property needs repairs, particularly if the rental unit is reasonably close to where they live. Others would rather have a management company or a manager do those tasks for them for about 10 percent of the value of the rent. Be sure that the cost of outside management is included in your analysis of the property before you buy it.
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