With interest rates at historically low levels and home prices still very affordable, interest has once again risen in purchasing a home to rent as a means of additional income. The amount of foreclosures available on the market has also helped to strengthen the number of investment buyers that have purchased homes and turned them into rentals.
As one of the few investment options that provides significant returns while you still own the asset, rental real estate is a great idea for many people with disposable income. However, it can be hard to determine if you’re choosing the right property. In the recent article “
What to Look for When Buying an Investment Property,” the experts at the Equifax Finance Blog explain what makes a good rental property.
Understanding the local rental market is critical to determine whether or not a property will make a good investment. However, it can seem impossible to judge what rental rates may be in 10 years or anticipate maintenance and repair costs. It’s also important to consider what would happen if you don’t have a tenant for an extended period of time.
One of the best ways to determine a home’s profitability is to compare its annual net operating income (or, the income generated after operating expenses are deducted) to either the capital cost (what you paid to purchase the home) or its current market value. This will give you the capitalization, or “cap” rate.
Cap rates allow you to easily compare two or more pieces of property. However, it’s not the only factor you should consider before purchasing an investment property. Be sure to consider the growth potential for the property’s income, as well as any potential changes that may affect the value of the property itself. For example, are there any major highways or retail establishments planned in the vicinity of the home? Also, understanding the local economy is important. Be sure that the area offers jobs and amenities that will continue to be draws for tenants for years to come.
To learn more about investment properties, including how to calculate the cap rate, be sure to read the full article on the Equifax Finance Blog.