Buying property to rent: what are the risks?
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The world of investments is full of options, there are different methods for different investor profiles, with the real estate market being the most traditional segment, which includes buying property to rent .
There is a lot of debate about rental housing, from those who think it is smarter than financing your own home, to those who disagree.
There are many reasons why people become tenants, which prevents this practice from falling into disuse. After all, as long as there is demand, there will be profitability .
In the real estate market, the best-known and most traditional type of investment is buying a property to rent out, as there are several ways to make this investment “pay for itself”.
But are there any risks involved in this type of investment? To ensure that this does not occur, you just need to know very well how this type of investment works.
How do I know what the rental income is?
When buying a property to rent, an initial investment is required, which is usually the down payment on the property, which can vary depending on its characteristics, it may need renovation or some maintenance.
To profit from the property, the investor needs to find a tenant, who will pay a monthly rent to occupy that space. This amount will become a recurring income for the investor, who can use this amount to pay the installments of the property, or reach the amount invested.
After reaching the cost value of the property, all rent collected will be profit for the investor , who will possibly own the property for the rest of his life, unless he chooses to sell.
But how do you calculate the value that the rent should have?
The final value of the property needs to be the basis for calculating its profitability. To achieve this ideal value, it is necessary to divide the rental value by the final value of the property.
If the result of this division is between 0.1% and 0.5% of the property value, the rent charged needs to increase, because profitability is very poor, therefore, there is no profit.
If the result is between 0.5% and 0.8% of the total value of the property, the income is good, but it can improve, so reconsidering the amount stipulated for the rent is a good option.
In an excellent scenario, from a profitability point of view, the result of this calculation needs to reach more than 0.8% of the total value of the property.
Once you know how to perform this calculation, you just need to find out how to identify what a property needs to have to be a good investment opportunity.
What should be analyzed in the property?
There are some essential points to ensure that the property is a true investment opportunity, which go beyond the investor profile, and can avoid investment risks.
The location of the property is the starting point for understanding how its value will increase. It is important that the region where the property is located has leisure areas, including parks and shops, as well as easy access to public transport, good infrastructure, schools, hospitals, markets and, most importantly, public safety.
All these factors add value to the property, contribute to its appreciation and, consequently, to the possible increase in the rental value charged, therefore, the profitability of the investment .
Another point to be evaluated is the profile of properties in that neighborhood, whether the majority are residential, commercial or student properties, this will define the target audience for your property, which will influence the type of your investment.
When investing in a property that is not up to standard in the region, the risk of the return not being as expected increases, due to competition and a different audience than the proposal for your property.
Finally, it is interesting to pay attention to whether the property in question has any signs that it will need maintenance, and whether these will be necessary.
This mainly occurs with older properties, which need renovation and maintenance, triggering costs that were not foreseen, and can generate risk to your investment, by harming your income.
Is it clear what the risks are of buying a property to rent out?
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