If you’re researching new investment options, buying a rental property is a popular choice for several reasons. The risks may be more acceptable than expanding your stock portfolio or other investments. Also, you can use the rent you collect to reduce the costs of financing and maintaining the property.
However, not all rental properties are created equal - and neither are your potential tenants. Choosing the wrong one can be an expensive mistake. However, if you do your homework before proceeding, you can minimize your risks and lower your stress.
Here are five things to consider before you proceed with purchasing a rental property.
1. Selecting Your Rental Property Location
Unless you’re investing in a vacation home that you’ll want to use during certain times of the year while renting it out the rest of the time, it’s a good idea to purchase a property that’s convenient for you to oversee and visit, even if you don’t plan to carry out the maintenance. Consulting with a real estate agent can also help you choose an appropriate property
2. Rental Property Management and Maintenance
If you’re determined to maximize your rental income and have the time, you can be a hands-on landlord or landlady and have tenants contact you when the property requires maintenance. However, if you don’t want this responsibility or don’t have the time, consider hiring a property manager.
In exchange for a set monthly fee – usually between 4 to 10% of the monthly rent - a property manager will prepare lease agreements, arrange repairs, collect rent and screen prospective tenants. Be sure to sign a legal agreement with a property manager if you hire one, so both of you understand who is responsible for which tasks.
3. Rental Property Expenses
Since the rent you collect will increase your annual household income, your federal taxes will probably be affected. However, rental properties may also provide tax deductions, although these often change. You should always consult with a tax adviser prior to making any decision based on potential tax benefits.
Other expenses you’ll want to anticipate will include major and minor repairs, maintenance and rental property insurance (also called landlord insurance). And it’s always smart to keep funds available for an unforeseen major expense. For example, if a storm destroys the roof of your rental property, your insurance may require you to pay a deductible.
4. Rental Property Tenants
Interviewing and screening potential tenants can be tricky, especially if you’ve decided to manage the property yourself. Depending on your state, you can probably order background checks and credit reports online. Asking for references from past landlords can be helpful, too.
The American Apartment Owners Association
provides a Tenant Screening service
for a fee plus numerous other tips, laws, and forms to keep you informed and help you to be a successful landlord.
However, no matter how carefully you screen tenants, you’ll have to consider what you’ll need to do if rents are paid late (or not at all), your property is damaged, or other problems arise. Eviction guidelines vary by county and state
, so it’s wise to review these. It never hurts to be prepared for a worst-case scenario.
5. Financing Your Rental Property
Certainty Home Loans offers numerous loan options for financing your rental property purchase. Contact your nearest Certainty Home Loans mortgage professional today
to get pre-qualified and to discuss your financing options.
Jul 17, 2019