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Investing in Rental Property

Investing in Rental Property

So your thinking about investing in property. Why question the present economical climate with low interest rates putting money into a bank or building society isn't going to pay you much. Stocks and shares are no longer a safe place, and so many people have been looking to buy property with a view to renting it out and creating an income.

When renting a property out in a rising market, when the price of property is rising its very easy to make money. As the value of your property rises, the amount of equity you have in the property also rises. The mortgage is being covered by the rent. If you had a rental property valued at $100,000 and the property market increased by 10% a year for two consecutive years. You would have made $20,000 over those two years as that is how much the value of the property would have increased by. Different countries have different property markets and different rules, regulations and tax laws. But in the United Kingdom back before the recession hit, this is how some people managed to create a small, or in some cases large portfolio of rental properties. Simply by purchasing a run down property with a buy to let mortgage, renovating, to increase its value. Renting it out. Then take the equity out of the property and purchase another property.

Then just do the same again, and again.

However, since the recession making a decent return on your money by investing in property has become much more difficult. Its easy to watch a television program about "making money from property" it looks so easy. Here are some issues for you to consider. It's now much more difficult to get a mortgage. Lenders have gone from throwing money at you to scrutinizing where every penny you earn comes from.

Many people fail to take into consideration the cost of the property being vacant. Its easy to assume that your tenant loves your newly decorated hose or apartment and will stay there there long term. But there are no guarantee's and its simply not realistic. You should assume that there will probably be times when your property will be vacant. In the United Kingdom there is a type of property known a H.M.O. House of Multiple Occupancy. In this instance a large four or five bedroom property where each bedroom is rented out to an individual, or couple and the bathroom/toilet and kitchen is shared. In some cases landlords will even convert the downstairs lounge and dinning room into extra bedrooms to increase the rent. The advantage is that if one or even two tenants leave, then you still have rent coming in until you find new tenants.

This leads to the next consideration. The costs involved in finding another suitable tenant. For new landlords this can be a surprise as to how much it costs to prepare the property to rent out again. Just a few of the costs include not only advertising for a new tenant, but also repainting, cleaning and generally bring the property up to a reasonable standard. Also, if any damage had been done to the property, the total cost of repair may not be fully covered by the security deposit.

Insurance. Most properties are rented out unfurnished. This means the tenants will have their own furniture and will be responsible for the contents insurance. But the landlord who owns the property will be responsible for the house insurance. With a rental property this is generally higher. And don't forget, if the property has gas, and most do, the landlord is responsible for organizing a gas safety check by qualified gas engineer. In the U.K. This is a legal requirement and is very important.

Raising the money. For the majority of landlords, obtaining a mortgage on the property is the only way they can afford to buy. If you are investing in a rental property in the UK you will need a 'Buy to Let' mortgage. With this type of mortgage the monthly repayments are interest only. Its up to you to find a way to pay off the capital that you borrowed. Most UK lenders will want at least 15% deposit. But the good news is that unlike a residential type mortgage, which is based upon your personal income. A buy to let mortgage will be based on the rental income obtained.

Choosing a tenant. This is, in my humble opinion the most important part. Before you actually begin renting out your property it is a good idea to sit down and determine what sort of tenant would be best suited for you and your property. Make sure that you check references. This can be time consuming and something that many landlords overlook if they feel as though they have a good instinct about the tenant when they meet with them. Not checking references however, can lead to a number of problems. You can uncover a wealth of information about potential problems before you rent to a prospective tenant.

In many cases using a letting agent can be the best way. Its also possible to hand the whole finding a tenant and managing the property over to a letting agent. This way you will not even have to meet the tenants. They will of course charge a fee, plus a monthly charge of normally about 10% of the rent.

Always, always use a legally written contract so that both parties know what is expected. In the UK these are known as Assured Tenancy Agreement. These documents can be downloaded from the internet for free. A picture never lies. Takes plenty of photos of your property before the tenants move in, alternately use a professional inventory clerk who will make a complete inventory of your property before tenants move in and after they move out.

Maintenance. This is your responsibility. If a roofing tile is blown off, or the central heating breaks down its down to you to put it right. Keep some money for things that might, and generally do go wrong. Remember that you are operating a business and as such you must be prepared for those times when expenses arise.

Talking of business, Any money that you earn will be classed as earned income so the tax man will want his share. Always keep the receipts for any repairs that need to be done and claim them back from the tax man, this includes the cost of the gas safety check.

And most of all remember, renting out property is a long term investment. The property market goes down as well as up. Hold your nerve, stick with it and it will all be worth it in the end.

Image by: Photo Dean