With the low rates of interest, more and more people are now choosing to park their assets in rental properties. After all, who can blame them? Without a doubt, this is an excellent investment, as long as you choose the right one.
Since return on investment or ROI is your ultimate goal, a potential investor can make use of the cap rate of the property to find the most ideal opportunity. Cap rate, or capitalization rate refers to the amount of rent an investor they will receive each year compared to the monetary amount they will spend.
For instance, if you buy a house for $100,000 with annual return of $10,000 after the expenses, the cap rate here is 10 percent. On the surface, it will seem like a no-brainer investment.
How about the property’s hidden costs?
A house of $100,000 is most probably going to be a much older structure which requires some work. There might be a need for you to spend lots of money to bring the house up to the code. What will happen when the furnace suddenly blows out on a snowstorm, or the roof gets crashed by the dead tree in your backyard?
It only means that your good deal on an old rental property might end up as a money pit.
Never Overlook New Rental Properties
If you are a real estate investor, you might see a better return on investment when you go for brand new rental properties. Take this scenario for example. You buy a brand new house at $200,000 then rent this out, with a $1,500 return after expenses. The cap rate is 7.5 percent. If you will compare it to the cheaper house in the example about, the rate might not be exciting at all. But, the beauty of the investment is that you escape the endless costs, which come with the old houses and you will be able to enjoy these benefits:
New Appliances and Warranties
With the new homes, the builders will put warranties often on the property. Usually, they will cover anything that might get damaged during the first year. Several offer warranties for up to ten years. You will not have to waste time searching for the bids from the foundation specialists or putting plumbers on speed dial. If a part of the property breaks, it is the problem of the builder and not yours. Aside from that, the appliances of your home haven’t been used. The water heater will not conk out, the roof will not leak and the windows fit and everything will be brand new.
Stick with the Basics
Before your home is built, you may get in on the ground floor and work with builders to customize the property. Keep the costs down through sticking with the basics.
A big value of new construction is that you are getting area homes in upcoming areas. You cannot pay enough for the low crime rates, nice sidewalks, good schools and roads, and great local parks. The people who want to rent in such neighbourhoods tend to be perfect tenants.