3. The cost of insurance.
One form of protection that is available to investment property owners is rent loss insurance coverage. The best practice is to buy a policy that covers a minimum of six months gross monthly rent. That way, whether you have someone move out and have a difficult time re-leasing the place, or if you have a tenant who stops paying rent, you can take advantage of that coverage rather than draining your own savings. This is an especially good idea in situations where you may have used that cushion on repairs that got out of hand in terms of expenses and don’t quite have six months’ rent in the bank for one of your properties — and you have a tenant move out at the last minute. Be sure to factor the cost of that rent loss coverage into your budget.
4. The price-to-rent ratio.
The purpose of this ratio is to compare the median rent and median home prices in a given market. To get this, divide the median house price by the median annual rent, and you’ll get the ratio. For example, when the U.S. market hit its peak in 2006, before the bottom fell out of the American housing market, this ratio was 18.46, but it slid to 11.34 by December 2010. The average over time, from 1989 to 2003, was 9.56. For consumers, the best time to buy is when the ratio is less than 15, and the best time to rent is when the ratio is over 20. If you are looking in a market that has a high price-to-rent ratio, you might want to consider a different market as you are simply not going to recoup as much of your investment because you’re having to pay more on a property that will yield less in terms of rent.
5. Cash flow.
Negative cash flow is hell for a landlord. You should set your rent so that you have enough to cover your mortgage and have a cushion for unforeseen expenses such as sudden repairs. Look carefully at your mortgage payment amount and your incoming rent. If you gamble the wrong way and lose — and if your tenant moves out — your savings can drain quickly, and you can end up heading into foreclosure.