5 Things to Consider Before Signing on the Dotted Line to Buy a Rental Property
Purchasing a rental property is a great way to build sustainable wealth through passive income. That doesn’t mean, however, that going this route is for everyone.
A rental property involves taking on financial, management, and legal responsibilities — and not everyone has the stomach for it.
Whether you’re a newbie investment property investor or are steadily growing a real estate portfolio, here are five things that you should examine before investing in a rental property.
1. Location, Location, Location
Location cannot be overstressed. Where your rental property is will determine, to a great extent, its demand, rental yield, and appreciation.
Look for neighborhoods with the following qualities, as far as location is concerned:
Robust job markets: Rental units near large employers, universities, or central business districts have better tenants.
Low crime: Tenants want to live where they feel secure, and the less crime, the better the tenants and preservation of property value.
Good schools: If your best tenants are parents, close proximity to good schools is a plus.
Research on the internet, read neighborhood market reports, or telephone local real estate agents to determine where to purchase an investment property.
Of course, you’ll get the best results if you hire a property manager close to where your rental property is. If you buy one or more rental units in a Houston area apartment complex, for instance, ensure you hire a Houston property management firm.
2. Know Your Numbers
Real estate investing will go much better for you if you know the numbers. Too many people invest in investment properties without performing due diligence.
You’re not ready to invest before you project the following to see whether or not to proceed:
Income: Look at comparable neighborhood properties to assess the probability of reliable rental income generation.
Expenses: Project mortgage payment, taxes, insurance, repairs, management fees, and vacancies.
Cash flow: Positive cash flow is most important.
Return on investment: Compute your anticipated ROI to determine whether the property will achieve your financial objectives.
You also need to ask yourself if the rent will cover your mortgage and operating expenses with some leeway for unforeseen repairs or vacancies.
3. Financing Options
Unless you’re buying in cash, you’ll need financing. Rental property loans often have stricter requirements than primary residence mortgages. Lenders typically require the following:
- A higher down payment (usually 20%–25%)
- A strong credit score
- Proof of income and debt-to-income ratio
Compare loan products and interest rates from different lenders to find the most favorable terms. Also, consider how financing a rental property may impact your personal credit and cash reserves.
4. Understand Landlord Responsibilities
Rent collection is only part of being a landlord. It’s just the tip of the iceberg.
Many rental property owners get overwhelmed with their daily responsibilities and rely on property managers who can help out with the following tasks:
Repairs and maintenance: You have a legal obligation to see that the property is safe and habitable.
Screening tenants: You’ll want to run credit, criminal history, and background checks to find the best tenants.
Disputes and evictions: Not everything will go smoothly, and you’ll want to be ready for court battles.
Compliance with the law: Landlord-tenant law is state-specific. Learn what the law expects with regard to deposits, leases, notices, and fair housing.
If you don’t want to bother with these duties yourself, consider hiring a property management company.
5. Property Condition and Inspection
Don’t let cosmetic appearances fool you. Conduct a very good property inspection so that you can avoid costly repairs later on.
Keep an eye out for roofing issues, plumbing and electrical infrastructure, HVAC status, foundation or structural problems, and pest or mold infestation. Again, a property manager can step in and help.
You’ll make perhaps the largest financial investment of your life buying a rental property, but it can be a moneymaker if you approach it the right way. Thorough research, a well-thought-out plan, and knowledge of the potential pitfalls of homeownership are required.
You might find that hiring a property manager is one of the best investments a rental property owner can make.
