It is no secret that investing in a rental property can be an excellent source of passive income. Rental properties have become very profitable recently due to the hassles of a daily commute here in the Philippines. Students opt to live in dormitories near their schools, while the workers opt to rent near their office. Even employers tend to rent commercial spaces for their offices.
With this, the demand for rental properties can seem very high. However, there are many factors that you need to consider when buying an investment rental property. This article will walk you through several of the most important factors to consider.
Being a Landlord
One consideration in investing in a rental property is your willingness to be a landlord. For the most part, renting out a property can seem very passive. However, many responsibilities come with being a landlord.
First of all, your property is, and always will be, your responsibility. Therefore, you should be ready to handle any major repairs. Broken tiles, plumbing, leaks, etc., will go through you, and your tenants will expect you to fix these for them.
Second, you will be in charge of screening your tenants. This part is crucial if your property is in a residential area. It is critical to be on good terms with your neighbors since they can look out for your property. As such, you need to screen your prospects and find well-mannered tenants.
Screening your tenants is even more crucial if you are renting out a fully-furnished property. You will be leaving your appliances and furniture to them for the duration of your contract. While your lease contract should cover any damages they make, the burden of replacing and fixing items will be on you.
Speaking of contracts, drafting and notarizing contracts is a crucial responsibility of the landlord. Ensuring that your lease contract is complete and comprehensive will save you from any legal troubles that may arise. Consulting with a lawyer on this may be a good move, therefore.
These are just some of the considerations of being a landlord. There are more troubles that you need to think about, including late rent payments, etc. So, before diving into this investment, make sure that you are up to the role of being a landlord.
Type of Rental Property
There are several types of property available out there that you can rent out. The type of property you choose should depend on the type of tenant you want to have. Here are some types of rental properties you can consider for your investment:
Residential
If you prefer to have a property rented out as living spaces, opt for residential properties. These properties include apartment complexes, condominiums, houses, and dormitories. Your tenants would consist of working citizens, students, and even families. If you prefer this, here are some properties you can consider.
1. Apartment complex
You can offer apartment complexes to working citizens and families, including newlyweds. These properties are very flexible and can be a home to several types of tenants. Most people also consider these complexes to be safe and convenient while providing more freedom than condominiums.
2. Duplex
A duplex is a common type of property that you can mainly offer to families. While it can vary from location to location, leases for duplexes can be longer than condominiums and apartments. As such, you should consider a duplex if you prefer to invest in a residential property with long lease terms.
3. Condominium unit
Condominium units are becoming popular in the Philippines. This popularity is because condominium units are usually located in convenient areas and built with amenities. A condominium unit is also very flexible in that it can house families, students, and employees. However, condominiums can be expensive to maintain. There are also a lot of restrictions on what tenants can do.
Commercial
Nowadays, employers prefer to rent their office spaces instead of buying properties for their business. Some buildings now house several different types of business. The office building is a possible investment choice for you and can be very profitable if done correctly. Commercial rental properties can also be for industrial use and not just offices and retail spaces.
Land
Investing in a land as rental property requires much research as this can be very risky. It is crucial to look into recent developments and even upcoming developments. Renting out land can be very profitable and can provide you with a steady cash flow. One thing you can consider is the possibility of growth of the area. Also, consider what to do with the land (develop, hold, etc.) and what rights you need to acquire for your intentions.
Buying in Cash or Financing
If you have enough cash to buy a rental property straight up, you have another crucial decision to make. Is it better for you to pay in cash? Or would it be wiser to finance your property instead?
There are advantages to both options. With financing, you are more liquid. Considering the illiquidity of real estate, this is a critical factor. On the other hand, buying a property in cash locks your cash in your investment alone.
Financing also allows you to work against inflation. However, buying in cash rids you of lender fees and high interest rates on mortgages. Also, buying in cash gives you better cash flows monthly. But at the same time, financing gives you leverage and higher returns in the long run.
Location
Every real estate investor will tell you that the most important factor is location, location, location! The location of your investment rental property might determine the outcome of your investment.
Why is that so? Well, your location will tell you what types of tenants you’ll have. Also, how much you’ll have to spend, and how much you can charge for rent. Location can make or break your investment!
To choose which location to buy an investment rental property in, here are some considerations:
- Property Taxes
- Neighborhood
- Available Establishments
- Amenities
- Average Rent Prices
- Vulnerability to Natural Disasters
- Accessibility to You
Insurance
While insurance can seem like a nuisance to some, it can also be an excellent investment. There are several types of insurance a landlord can consider, and here are some of them:
Landlord Insurance
Landlord insurance takes care of your property. This insurance then is crucial if your property is vulnerable to natural disasters. This insurance also protects the landlord from theft, lost rental income, and furniture destruction.
Liability Insurance
Liability insurance sometimes can come in a package with landlord insurance. This insurance protects the landlord from injury within the property. Liability insurance can also cover property damage due to incidents within the property.
Renters Insurance
Finally, there is renters insurance. Renters insurance is relatively cheap, and landlords may opt to require this for their tenants. Renters insurance protects the tenants in case of loss or damage to their personal property.
Property Condition and Maintenance Costs
One more factor to consider is the condition of the property you are buying. Some people prefer to buy old, inexpensive rental properties and then flip them to become profitable. On the other hand, some prefer to invest in new properties wherein they will be the first users. Others also choose to buy land and develop their property to their liking.
Whether you choose one or the other, it’s also critical to factor in maintenance costs. Of course, newer properties would entail lower maintenance costs. But this would also depend on how your tenants take care of your property. As such, you can connect this with your capacity as a landlord.
In conclusion, there are lots of factors to consider when buying an investment rental property. However, once you’ve done your research, this investment can be a highly profitable passive income source for you!