Buying a piece of real estate to serve as a rental property can be extremely beneficial. Whether you’re seeking to earn some passive income, diversify your investments, or simply value the secure financial move, there are countless reasons to purchase an investment property. However, before you take the plunge, consider the following tips.
1. Make sure it’s the right time.
With any investment, several factors drive decision making, but when buying real estate, taking a holistic approach—with current economic conditions at the forefront of the decision-making process—is critical. Consider current market conditions, cash flow, and the benefits of ownership to form an educated decision.
2. Find a good location.
There’s a reason the saying, “location, location, location,” is frequently used in real estate—location is extremely important when buying a rental property. Before purchasing, evaluate the neighborhood’s quality, school districts, parking, walkability, crime rate, and nearby amenities. Make sure the property is in a desirable location where people will want to live.
3. Only purchase if you plan to hold on to the asset for a while.
It's recommended that investors hold on to their assets for quite a few years. Normally, 10-15 years is an adequate amount of time to realize the maximum benefits of appreciation, increasing rents, and the tax benefits of a depreciation schedule.
4. Provide enough of a down payment
When it comes to an investment property, the down payment will likely be a little higher than that of an owner-occupied property. Ensure you provide enough of a down payment so the carrying costs (principal loan payment, taxes, insurance, HOA dues, and management fees), coupled with expected rent, yield a positive cash flow.
5. Set aside ample funds for repairs.
It’s essential to set aside enough funds for the occasional minor or standard repairs. A typical property should expect annual repair costs to be at or below half of one percent of the property's value. For example, a $185,000 home is calculated this way: 185,000 x .005% = $925 in estimated annual repair costs.
6. Consider partnering with a property management company.
Owning a rental property isn’t always easy. Finding a tenant, collecting rent, and performing routine maintenance can be a lot of work. For these reasons, many landlords turn to a property management company to assist with day-to-day responsibilities. Working with a professional, you’ll receive personalized advice on pricing and other factors that give you a competitive edge.
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