Is Buying A Rental Property Best For You?

Have you ever thought about being a landlord?

There are many ways to diversify your investment portfolio, and investing in real estate is one of them. Many people buy properties with the intent to rent them, especially in highly populated areas like big cities and college towns. But before you shell out thousands of dollars for a down payment, consider these crucial points.

Find The Right Property

Finding the right property is a tough and crucial component of successfully owning an investment property. So what makes your potential property right?

  • The neighborhood
    • The neighborhood is one of the biggest factors that influence renter’s decisions. Is your house in a desirable location? Would you want to live there if you were renting? It is worth it to wait for the right spot!
  • The cost
    • Many financial experts advise keeping the cost of your first investment property low, $150,000 or less if you can. This way you will not be as overwhelmed by upfront cost requirements and may be more likely to have a positive cash flow sooner, as you will have fewer expenses.
  • The condition
    • What state is your potential property in? Will it simply need a few cosmetic repairs, or is the floor uneven and falling apart? Assessing the amount of work you would need to put into a house is a crucial factor in deciding if it is going to be a good investment. Take the time necessary to determine if you’re up for any challenges.

Know Your Expenses

It’s important to understand the financial responsibility you will have when owning a rental property. As a landlord, you still have property taxes to consider, and in some areas like bigger cities, those property taxes can be notably higher.

It’s also good to know that some locations charge investors more than owner-occupants, so you could pay a higher tax rate to rent the property. Be sure to look into that so you aren’t surprised when you get the bill, and know that the rents can support it. This is a payment you will need to make, so you will need to see how property taxes fit into your overall investment strategy.

Your mortgage interest rates will be higher. Most lenders charge a higher interest rate for rental properties than traditional mortgages. Additionally, your rental property will need insurance, and it’s up to you to decide the amount of coverage you’ll be comfortable with.  Unless you’re renting a furnished property, contents insurance may not be necessary.

Budgeting for small fixes like drywall repair or carpet cleaning may already be in the budget, but do you have a contingency fund if the roof needs to be repaired or the air conditioning unit gives out? These are costly expenses that will be your responsibility as the landlord, so creating a separate emergency fund for your rental properties is a great idea so you don’t have to dip into your personal savings to cover the bill.

Remember Your Renters

Many people can tell you their horror stories about being a renter, but the same can be said for being a landlord. Once you find the right property and evaluate the costs associated with it, the next step is finding and retaining renters.

Finding the right tenant can be difficult so it is important to have a thorough screening process, background check, and credit history to ensure that they can and will pay you each month. To that end, it is important that you are firm with the lease and stick to it such as late fees for delayed payments and responsibility for property damage. Many landlords like to check in on their properties once or twice per year to assess the property and ensure it has remained in good shape.

One risk of an investment property is unplanned vacancies between tenants.  Each day it sits unoccupied reduces your overall profit. You will have to continue paying mortgage, insurance and taxes regardless of whether you’re collecting rent.

Don’t Forget Yourself

Buying a rental property is a great way to add to your investment portfolio, but it isn’t for everyone. It’s important to look at your finances and see if this is a route you are interested in pursuing. Be honest with yourself about what you want and the goals you have for pursuing real estate as a means of investing.

By evaluating your financial goals, you are setting yourself up to make the right choice for you! Be sure to seek advice to see how this may fit into your financial portfolio.

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.

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