Real Estate Investing – Considerations When Buying a Rental Property
Seashore vacation destinations are a popular choice for real estate investing and LBI is no exception. The surf, sand, shopping, and other activities are major attractions for vacationers so it would seem that buying a rental property at the Jersey Shore would be a sound investment. As with any other investment, it’s important that you do a little research beyond just checking out the current listings to make sure the rental property you choose will turn a profit. Here are some things to consider before jumping in with both feet.
The 1% Rule
From a financial perspective, this could be one of the most important considerations. While each investor has their own specific goal for income from a rental property, the common rule of thumb is the monthly return should be at least 1% of the purchase price. For example, if you buy a rental property for $150,000, you’ll want to receive a monthly income of at least $1,500. The exception to this rule would be if property values and rental incomes are quickly increasing because the area is rapidly going through a positive change.
When buying a rental property, you will also need to factor property taxes into the equation. These taxes will take a bite out of your rental income. To offset higher taxes, you may need to charge a higher rental fee but only if the property warrants the increase. If the rental fee doesn’t line up with the condition of the property and comparable rentals in the area, you may want to look for a different property to invest in. Tax rates vary by location and can often be higher in resort or vacation destinations. Also, some locations charge higher taxes on rental properties. It’s important to gather and evaluate all the area specific property tax information before making a final decision on buying a rental property.
The cost of insurance will also eat into your rental income, so it’s important to do some research before making an investment. First, you need to assess what type of insurance you need and how much coverage you want. You may be able to lower your premium if you choose a higher deductible. A vacation rental insurance policy typically covers the following:
- Liability: Personal injury to your guests or anyone at your rental property.
- Contents and structure: The building and its contents are covered in the event of damage, theft or fire. Some policies may also include amenities such as a swimming pool, bikes, and small watercraft.
- Lost income: Should damage to your property prevent you from renting it for a period of time, this portion of the policy will cover that lost income.
In some areas, additional insurance may be required due to its vulnerability to flooding, tornadoes, hurricanes, earthquakes or other natural disasters. In many areas on LBI, flood insurance is required. Again, before making a final decision on a rental property, it’s a good idea to consult with multiple insurance companies to discover insurance plan you need and compare rates.
If you’re planning on buying a rental property, you should have a financial cushion to cover any unexpected expenses such as necessary improvements or repairs. Otherwise, these expenses could end up depleting all your monthly income. It is recommended that you estimate the cost of major repairs such as a roof, HVAC system, and the hot water heater and always keep that amount of cash or credit available to cover these expenses.
Real Estate Investment Professionals
As with any real estate transaction, it’s vital that you work with experienced professionals when investing in real estate. The Freeman Group has the knowledge and expertise to handle any type of investment, whether it’s buying a rental property or investing in an entire development project. If you’re ready to take the leap and add real estate to your portfolio, contact us and let’s talk. We’re certain our team can provide you with a variety of investment opportunities and help you make the best choice for achieving your specific goals.