Investing in rental property is a sure way to create a retirement income that will enable you pay your bills during your retirement life.
The previous article in this series explained in detail the three key benefits of rental property investment.
Click HERE to read that introductory article to rental property investment . . . if you have not already done so.
This section of this retirement planning guide focuses on how to get the highest return on investment when you decide to invest in rental real estate.
How much money you can earn from your real estate investment when investing in rental property depends on your choice of property and the location of that property.
So, what should you consider when deciding which rent property to buy?
The first obvious things to consider are:
1. That the property is not located in an area that is not under government acquisition or set aside by the government as committed land
2. That the property documents are genuine by verifying the genuineness of the property documents at the surveyor general's office of the state where the property is located
3. That the person selling is the true owner of the property or that he has a genuine power of attorney document that authorises him to sell on behalf of the owner.
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Once you have gone past the first elementary criteria above, the next thing is to analyse the potential return on investment of the property.
How do you do that?
The return on investment (ROI) analysis simply says, "How long will it take me to recover my investment in this rental real estate? What is the payback period of this rental property?"
In practice, the payback period of a rental property is calculated as . . .
Payback Period = Selling price Divided By Rental income per year
The lower the value you get, the higher the return on investment of the property.
For example, a property with payback period of 15 years has a much higher return on investment than a property with 25 years payback period.
Doing this rather simple payback period analysis before investing in rental property will ensure that you purchase property with the highest return on investment potential.
There are other criteria to consider when investing in rental property.
One of them (the first criteria) is the property occupation rate of the area where the property is located.
Remember that the payback period calculated above assumes that the rental real estate will generate a certain amount of rental income for the buyer per year.
However, that income will not be achieved if part of the property is vacant or unoccupied by a tenant.
Therefore, when buying rental property you must evaluate the occupation rate of the area before buying.
For example, is the area a developing neighbourhood where new houses are springing up faster than they are being occupied?
If so, then the occupation rate is likely the increase in the future as more tenants move into the area.
Alternatively, is the location of the property close to an industrial area that is now being deserted by companies for one reason or the other?
Are most houses partially occupied or empty because workers (and their dependents) are moving out enmass in search of greener pastures because their companies have shut down?
If so, the occupation rate of the rental properties in that area is likely to drop further. And the actual payback period at the end of the day will be much worse than calculated.
When investing in rental property, be sure to do your homework well.
The biggest benefit of rental real estate is providing passive income for the investor after retirement. And this passive income will enable the retiree to enjoy financial freedom even after retirement.
However, that goal will be defeated if you invest in a low yield rental property or buy rental property that is located in an area under government acquisition.
Therefore, this retirement planning guide highly recommends that you use the services of a seasoned real estate agent when investing in rental property or buying land for investment purposes.
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