The rental market in the United States is stronger than ever, with many young people opting to rent in cities rather than buy their first home. The fact is, the younger generation prioritizes different things than generations past.
College debt and older child-rearing years mean millennials are renting well into their twenties. And the more renters, the larger the demand and the stronger the rental market.
It’s why you need to capitalize on the trend when you’re thinking about investments. Crowded, desirable markets like the southeast Florida area just keep seeing home prices climb.
Diversifying your investments is always wise. Rising prices combined with strong demand makes the southeast Florida real estate market one of the smartest ways to hedge your portfolio.
Today, we’re bringing you seven things to know before buying a vacation rental property.
Location, Location, Location
The local real estate market is the single most important thing to look at before buying your rental property. If there’s no demand, you won’t find any renters.
Always search for markets with low vacancy rates and high demand. Low vacancy rates mean higher rental floor prices and high demand means enough renters to guarantee you’ll fill your unit.
Plus, areas with limited properties, while representing a costly investment, also represent an opportunity for your property to appreciate in value over time. As your property values rise, you’ll passively make money on the investment, in addition to collecting rent.
Location Continued: Taxes
Beyond location affecting supply, demand, and long-term value, where you buy rental property also affects how much you’ll pay in property taxes. And while it might not seem like much, property tax varies enormously by area.
For example, Delaware residents only pay 0.43 percent of their home’s value in property tax. New Jersey residents pay a whopping 1.89 percent.
You need to ensure your rental property commands a high enough monthly rent price to make up for what you’ll pay in property taxes. For those looking to buy property out-of-state, hot markets with low property taxes, like Denver, represent a good investment.
Rental properties come with all the responsibilities of owning a home, despite the fact you won’t live there. Potential landlords often fail to account for unexpected expenses that arise both during the purchase process and later into their rental ownership.
In the long-term expect some unavoidable costs. Roofs need replacing, furnaces wear out, and siding needs upgrades. It’s not an if, but a when these things will cost you money.
Plus, larger rental properties (apartment buildings, not individual homes) cost even more to maintain long-term. Industrial furnaces especially drive up costs.
During the purchase process itself, you need to watch out for sagging floors, the current roof condition, water damage, termites, etc. It’s very important to hire a professional home inspector to ensure you’re not buying a house with significant damage.
Homeowners insurance is a must for any landlord. Just like your vehicles, you’ll want to protect your property from fires, natural disasters, and other events. How much coverage you need directly depends on both the property’s location and your expected return on investment.
For instance, areas prone to natural disasters have more expensive insurance. Likewise, the more you spend on insurance the less ROI you’ll see from rent.
Policies with higher premiums mean lower deductibles when disaster strikes but less ROI upfront. Lower monthly premiums mean more income but higher deductibles.
Depending on your schedule, your potential rental property’s location, and more, you might consider hiring a management company. This entity can handle rent, leasing agreements, and more.
While you can manage property down the street from your home, that doesn’t mean it’s worth your time. And a property management company is mandatory for property in other states.
When you’re dealing with an out-of-state property you need someone to handle day-to-day tasks. This person can help sign leases, forward documents, and interact with tenants. Factor in a management fee when determining your eventual profit.