Are you thinking about purchasing a rental property? Being a landlord comes with numerous benefits—including the chance to enjoy monthly reoccurring income from tenant payments and the ability to increase your portfolio reasonably quickly.
But there are a few downsides to the process including several financial issues. Here are four things to consider before investing in a rental property.
#1: How You Plan to Finance the Property
If you’re thinking about investing in a rental property for the first time, one of the most important aspects to consider is how you plan to finance the property. Conventional loans often require a credit score of 640 or higher and a minimum of 20% of the purchase price for a down payment. But there are alternatives. You can also consider private loans from friends or family, hard money loans from other investors, or taking out a home equity loan on your personal residence. There are also options in working with other new investors to pool your funds and purchase the entire property outright, but that also comes with risks. Weigh your options carefully and choose one that meets your unique needs and budget.
#2: Facts of the Neighborhood You Plan to Buy In
Before investing in rental property, you need to take time to research the facts of the neighborhood you plan to buy in. Families want to ensure they’re moving into a safe area. While a specific property might look like a good deal, it could be tough to find quality tenants due to location. Various aspects to consider include:
- School quality
- Crime rates
- Instances of registered sex offenders
- Busy roads or traffic
- Current number of rental homes and/or desire for another rental unit
These are all factors that play a role in the ability to rent the home once you’ve purchased it and made any necessary renovations. Ignoring any of them could seriously limit your ability to charge top dollar monthly.
#3: The Process of Managing a Property
How do you plan on finding and keeping quality renters? Will you attempt the process yourself or hire a local property management company? Do you understand the specifics behind tenant screening and the legal aspects that go along with it? The process of managing a property is more than just handing over the key in exchange for a monthly payment. Before investing, you’ll want to have an idea of how you plan on handling the various aspects of being a landlord.
#4: Planning for Unexpected Expenses
Most of the time, rental homes are a great way to enjoy reoccurring monthly payments. But that investment also comes with a downside—unexpected expenses. Whether it is a leaking roof or the need for a new hot water heater, there are always emergencies and routine maintenance tasks that need to be accounted for in your budget. Having a plan for these issues or a so-called cushion fund is important.
While these are all important considerations, they aren’t the only ones you need to think about. Seasoned landlords, what additional tips do you recommend to those looking to invest in rental properties for the first time?