Financial Considerations – A Look at Rental Profits and Expenses

The financial aspects of renting out your home to possible tenants can be hard and tedious. However, without a proper valuation of your property and the ability to create a valid estimate of your costs and expenses, you’d basically just be running in circles without much hope for finding your bearing.

Valuating Your Property

Estimating the income you can make from a rental real estate investment can be tricky, but it’s definitely worthwhile when you look at the potential profits and are able to justify charging more for rent. Consider the following guidelines for valuating a residential rental property:

Among the most used and recognizable methods is the sales comparison approach (SCA). This technique involves comparing your property with similar homes that were rented over a certain period of time in the recent past.

Another way you can value your property is through the “cost approach” which basically implies that a property is merely worth what it can be used for.

Factors such as the land value, the surrounding area and environment or the value of any types of improvements made to the property are often highly regarded here.

In a nutshell, the more benefits and the better potential for diversified use the property offers to tenants, the higher its overall value will be.

For instance, a large house with fewer facilities situated someplace at the outskirts of town may be less appreciated as a rental property than a condominium in a central location that allows quick access to the best venues, schools, clinics, shops or service providers.

Once you know how much your property is worth, it’s time to establish boundaries and make an estimate of all the costs you’ll need to cover as a landlord.

It will not be easy to cover all the details involving your expenses, however, as long as the property value allows it, setting the amount of rent you can charge will depend almost entirely on these numbers.

A Look at the Costs

Apart from normal expenses, there might also be some costs you either can’t plan for or are not fully evident from the start. While a few of them may have crossed your mind, in a lot of cases you have to be very careful if you want to have a good estimate of these expenses:

• Mortgage payments are usually the core expense you have to think of when it comes to rental properties. They are generally made on a monthly basis, and depending on the deal you’ve struck with your lender, the interest rate and the sum of each payment may vary with the passage of time.

• Probably one of the most obvious expenses associated with being a landlord is insurance. In some cases, your insurance policy will grow by 25% as your status changes from regular homeowner to that of investor.

• The care and maintenance of the property will also require a substantial investment even in best case scenarios. You can expect to pay more than $1,000 just on services such as painting, gardening and floor cleaning, with additional repairs and maintenance tasks such as fixing roof leaks or addressing plumbing issues also leaving potential holes in your pockets that you should account for.

• Legal fees and administrative charges can be a costly issue for many landlords. Some attorneys will ask for a flat rate of more than $200 in exchange for services and legal advice given to landlords.

• Although some tax breaks may be applicable to rental real estate owners, owning a property and not living in it will increase some of the taxes you’ll be expected to pay and reduce a few advantages that regular homeowners can benefit from.

Future Prospects – Is It Worth It?

Ultimately, even with these additional expenses that many landlords don’t plan for, renting out a home can be a great source of profit in the long run.

While buying a rental property will require a significant down payment at the beginning, as well as mortgage payments, repair costs, insurance, bills, taxes, legal fees and more down the line, when you rent out your building, the basic fact is that someone else will be paying for most of the costs, while you can wait patiently to reap the benefits.

By planning it properly, your rental investment will reap significant profit that will eventually allow you to invest in additional properties, manage your current ones and reap the benefits of a passive income and a possible early retirement.

And what’s best it that you will not have to do much more than what a regular homeowner would.