Are you thinking about investing in rental property? Sure, it may seem like a promising venture, but it’s essential to take a step back and carefully evaluate your decision before writing that check and sealing your commitment.
Here are five crucial factors you should consider before taking the plunge:
The Property Itself: Conduct a Thorough Inspection
Before finalizing any deal, it’s crucial to bring in a qualified inspector to thoroughly examine the property. Assess the plumbing and circuitry and look out for any signs of pest infestations. Additionally, consider the potential need for upgrades or repairs to ensure the property is in optimal condition for rental purposes.
Location Matters: Know the Neighborhood
Understanding the neighborhood that you’re investing in is vital as it directly impacts your potential tenants. Different demographics will have varying needs and preferences. For instance, college students will seek different amenities compared to families or senior citizens. Take note of property taxes and crime rates in the area as well to gauge its overall suitability. Property taxes (prorated for a month) in some states can be higher than a monthly mortgage payment.
Determine the Cost: Renting Versus Owning
Use the calculator on our CTS Assistant app that you can download to your phone or access on our website to determine if it’s cheaper for a renter to rent your property or buy their own. If it’s cheaper for a renter to buy rather than rent your property, you may have to lower the monthly rent. With interest rates currently higher, potential renters generally can rent cheaper than buying. However, when rates drop, they may become buyers, and you are looking for a tenant.
Calculate the Cap Rate: Assessing Return on Investment
Determining the capitalization rate (cap rate) is also essential to understanding the property’s potential ROI. To calculate the cap rate, divide the property’s net operating expenses by the purchase price. It’s preferable to have a high cap rate, indicating a more favorable return on your investment. (To learn more about calculating your cap rate, check out this resource).
Supply and Demand: Evaluate Market Conditions
Ensure you assess the supply and demand dynamics in the area you’re considering for investment. Look into vacancy rates and available listings to understand the current market conditions. A low supply of rental properties and high demand from potential tenants are positive indicators of a profitable investment.
Once you’ve settled on a rental property that aligns with your investment goals, it’s essential to have a knowledgeable team by your side. At Colorado Title & Closing Services, we bring over 75 years of family-owned experience to the table. We’re the pioneers of title insurance in Western Colorado and continue to offer the most comprehensive title and closing services around.
When it’s time to seal the deal on your investment property, Reach out to us through our website, and let us guide you through a successful investment journey.