Buying a rental property is a great way to put your savings to work. You can take out a mortgage to buy a property and then pay it off using monthly rent from your tenants. Your initial investment is secured and after a period of renting it out, you will own the property outright meaning you have grown your capital substantially.
When taking out mortgages it is useful to be able to show a bank how much you will be able to rent the property for. If you can prove that you will be collecting $1,500 a month in rent they will be happy to give you a mortgage with monthly premiums up to this sum. However, how do you accurately estimate the rent you will be collecting on a property you don’t own yet? This article will take you through several different ways of getting that accurate estimate.
Do you understand the local rental market?
The first thing to ask yourself when you are considering buying a rental property is whether you have a good understanding of the local market conditions. If you are buying in an area that you live in or know well you will have a distinct advantage over those buying in areas unfamiliar to them. Do you have a good understanding of the transport connections? Of the proximity of supermarkets and other essentials? Do you understand who makes up the local rental pool?
Knowing the answers to these questions will help you understand what level of rent you are likely to be able to charge and therefore how large a mortgage you could get.
The simplest way to show your projected rental income to a lender is to have a tenant in place at the time of purchase. An existing lease agreement that shows that the current tenant will keep paying the agreed-upon rent is solid evidence of the rental property’s worth.
If the tenants are planning to leave once the sale is complete then you can ask the listing real agent or previous owner for documentation proving how much has been charged for rent in the past. You can submit this to the lender as proof that tenants are happy to pay this rent for the property.
Using an ROI calculator
A return on investment calculator is an online tool that you can use to estimate how much a particular investment will pay out. Many companies provide ROI calculators that are specifically designed to estimate returns on a rental property.
A rental estimation calculator allows you to input your costs and your mortgage payments against your rental income and work out what the return on your property investment will be. HelloSafe is an online comparison site and it has a free to use calculator that can help you when working out projected expenses and income.
Using rental sites
Another way to find out what you could charge in rent is to use rental sites like Zoocasa. Type in the address of the property you are considering buying and take a look at what is on offer in the local area. Using Zoocasa’s interactive map you can see what landlords are charging for similar sized properties in the area.
It is a good idea to take a look at how long properties have been vacant for too. If a home has been on the market for six months it may be that the landlord is asking for too much rent.
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