Investing in single family homes can be a lucrative opportunity for many people, especially those looking for a steady stream of income through rental properties.
However, it is essential to make sure that the expected rental amount is enough to cover expenses before purchasing a new rental property. In this article, we'll discuss why it's important to estimate rental income accurately and how to do so.
The first thing to consider when investing in a rental property is the expected rental income. This amount should be sufficient to cover all of the expenses associated with the property, such as mortgage payments, property taxes, insurance, management and maintenance costs. If the rental income falls short of these expenses, you could end up losing money on the property.
To estimate the rental income accurately, it's crucial to gather as much data as possible about comparable rents in the same neighborhood as your potential rental property.
This data should come from homes that are of a similar size, AND in the immediate area of your potential purchase. Even a neighborhood over could be a make or break in getting the numbers that you need, so make sure it IS in the same subdivision.
- Square Footage shold be within plus or minus 10% of your home
- A similar number of Bedrooms and Bathrooms
- Similar ages, plus or minus 5-6 years. More than this age difference is where we tend to see the rent trend start to vary, even in the same area.
- A similar number of garage spaces.
- You want a good sample size, and the more recent the better, but no more than 9-12 months back, or you are too outdated
Third Party Valuation Tools can give you an idea, but try several before relying on just one source. As a Licensed Borkerage, we of course consult the data contained in the MLS, but we also use other data providers to give us a broader range of data too.
Sites like Realtor.com, Zillow, etc. can provide estimates, but ask the person that will be managing the unit for their advice too.
If you're working with an outside real estate agent that is not going to be managing the property, it's essential to make sure that they provide you with rental data for comparable properties in the same neighborhood. This data should be used to back up the agent's rental estimates, and you should see rental amounts for homes that are similar to yours, including size and rooms.
It's not uncommon for property managers to take on a new property for management, and the amount that the home rents for is wildly different from the amount the buyer's agent estimated.
The buyer's agent should be able to provide you with a list of properties that have been rented in the same area and have similar features to the property you're interested in buying. This data will allow you to estimate the rental income accurately and ensure that it is sufficient to cover all expenses associated with the property.
Estimating rent is just like estimating the cost of a home, and is just as important as determining the purchase price.
In conclusion, when investing in single-family homes, it's essential to make sure that the expected rental amount is enough to cover expenses prior to buying a new rental property. If you're working with an agent, make sure they show you comparable rents in the same neighborhood as your property to back up their rental estimates. Gathering accurate data will allow you to estimate rental income accurately and ensure that you're making a wise investment decision.