If you’re considering purchasing a rental property as an investment option, it’s good to weigh the pros and cons first. Rental properties can be a great source of secondary income, but they also can require significant work. The good news is that when you know what to expect, you can plan accordingly.
Before you buy a rental property, look at these 12 things you should keep in mind!
1. You May Gain Income from the Rent Payments
One of the biggest benefits of buying a rental property is the promise of a new income stream. Ideally, you’ll be able to rent out units within your property — or the entire property — and gain income from rental payments. For many people, this is the driving force behind choosing to invest in a rental property.
Plot out how much rent you can reasonably charge potential tenants — or what the peak season is if you’re aiming to rent out a vacation home. Then crunch the numbers.
Will you be able to do more than just cover the cost of your mortgage payments? If the answer is yes, then purchasing a rental property could be the right choice.
2. Tenants Can Be Unpredictable
When it comes to buying a rental property, the biggest unknown might be the people who end up renting space. Even if you use a thorough screening process for new tenants, you still can face some unfortunate surprises. Know this risk heading into the process.
Tenants may not pay rent on time. Tenants may do more damage to the property than you were expecting. And if you’re renting out a vacation home that you plan to use, too, the last thing you want to deal with is property damage.
3. How Much is the Down Payment?
With rental properties, down payments can be a more expensive matter. In fact, you may need to put down around 20% upfront. This number is higher than what is expected for a traditional home.
If you don’t have that kind of money readily available, though, you can still make it happen. You may be able to use personal loans or other means to cover the cost of the down payment. Do the calculations to determine if the property is feasible for you when you consider the down payment.
4. Understand Operation Costs
If you’re hoping to purchase a property with multiple units, take the time to understand how much it will cost you to operate the property. Operation costs include things like utilities, repairs, insurance costs, and more. You may also take a financial hit if you’re not able to find a consistent stream of tenants and need to do upkeep while the space remains vacant.
These costs can add up quickly, and you don’t want to be surprised. Be aware that you’ll end up paying more for a rental property than simply the cost of the building. You’ll need to do the math to determine if the costs outweigh the benefits.
5. Buy a Rental Property in a Good Location
Knowing what to look for when buying a rental property means paying attention to the location. Are you buying a property near water? While that can be a good thing, it might also suggest that your property is at risk for flooding, hurricanes, or other natural disasters.
If you get a property in a transitional area, try to determine if there’s enough upswing within the area to make the investment worth your while down the road. Look for properties in cities that are growing or picturesque areas that will have demand for rentals. Avoid buying in areas that are on the decline.
6. Consider the Property Value Growth Prospects
When you’re looking into buying a rental property, calculate what the return on investment (ROI) will look like. The ROI is how you’ll know if the property is worth the effort. It considers how much you gain from the investment versus how much the investment costs.
While buying a property with lots of construction nearby might seem like a negative, it could be a good sign. Seeing that there are plans for new buildings in the area could be a sign of growth. And that could help with the growth in the value of your property.
7. Know the Scope of Repair Needs
Buying a house that needs a lot of work can sink your investment really quickly if you’re not careful. Having to replace big ticket items like an HVAC system or roof can gouge your bank account. It’s worth taking the time to know how much you’ll need to repair right away.
Before you sign on to buy any house, get it inspected. It’s critical to have an expert evaluate the property so you’re aware of major structural issues. Finding out that the foundation needs to be redone or the windows all need to be replaced could be a dealbreaker.
8. Know That You May Need a Property Manager
Since you’ll need to seek out renters, collect payments, and address maintenance concerns, it can be helpful to have a property manager. You’ll pay out a little for the service, but it will save you time and money.
Gather information on property management to learn how it may be a good solution for you. You’ll be able to hand over some of the basic tasks to someone else and spend more time on bigger ventures. And you’ll know that you have a professional and experienced person representing your property.
9. Plot Out the Insurance Costs
Looking into home owner’s insurance is a given when buying a home, but look into landlord insurance, too. If you’re committed to renting out the property to others, this insurance policy will offer some protection for you.
Landlord insurance protects the building as well as the items within it. It can also defray medical costs if someone renting your space is injured within it. If you envision renting out your property on a regular basis, landlord insurance offers more protection than homeowner’s insurance.
Add up how much opting for these insurance policies will set you back each month. As you try to determine the return on investment, insurance premiums are a cost that can be easy to overlook.
10. Look at the Zoning in the Area
Another step in the process is to educate yourself about zoning laws in the area. Zoning laws determine what types of properties can be built in a particular part of a city. And they can place restrictions on the appearance of buildings as well as their placement within a plot of land.
If your desired rental property sits near vacant land, it’s worth learning what the land use laws are like. You could buy a vacation property only to find out that its gorgeous view won’t last due to an upcoming construction project nearby. Or you might suddenly find yourself surrounded by more industrial buildings than you were expecting.
11. Consider What Debts You Have
It’s better to make a significant purchase if you have a clean slate financially. Do you have student loans? Do you have high-interest credit card debt hanging over you?
When you have personal debts that take a chunk out of your monthly paycheck, you might be better off waiting until these debts are gone. Purchasing a rental property often involves making sudden and unplanned payments for repairs and other issues. And you may get a better loan rate if you’re free of debts.
Do the math before signing any paperwork for a rental property. Grab a calculator and investigate whether you’ll make enough extra income from the property to merit the purchase.
12. Be Prepared for the Unexpected
Are you still wondering, “Should I buy a rental property?” The answer is complicated and might depend on how much risk you’re willing to accept.
Ultimately, when you’re purchasing a rental property, you need to be prepared for the unexpected. Even for the best planners, sometimes things go wrong. And if you’re prepared, these moments of crises won’t loom as large.
Make sure you have enough cash stashed away for rainy days. And don’t go it alone. Cultivate good relationships with your local plumbers, HVAC repair people, roofers, and other maintenance workers so they can help you in a pinch.
Weigh the Options
Knowing whether to buy a rental property takes time and planning. You want to be certain that you’re investing in a property that’s worth the time and money — and that you know your goals for the property. You could end up making a really great choice that gives you a strong return on your investment!
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