Should You Buy Rental Property?

quickanddirtytips.com

By Laura Adams, MBA

Money Girl

May 3, 2010

With so many distressed listings and foreclosed homes on the market right now, the idea of investing in real estate seems to be gaining popularity. If you’re wondering whether you’re cut out to be landlord, I’ll tell you in this article.

Advantages of Owning Rental Property

Owning real estate certainly has its pros and cons. Let’s start with the good stuff: It can be very profitable. Real estate is a tangible asset that you control and everyone needs a place to live. You can make money with real estate in two basic ways—cash flow and appreciation:

• Cash flow or income results when the rent you collect from a tenant exceeds your total expenses. Expenses for a rental property may include the mortgage payments, property taxes, insurance, maintenance, and repairs.

• Appreciation is the increase in value that a property can experience over time.

How to Make Money on a Rental Property

You might buy a property in a good neighborhood that needs repair. If you’re handy and like doing fix-up work (or have enough profit in a deal to hire a contractor), you can make the repairs and sell it for a profit, or keep it for a rental. Some people like to invest in multi-family properties that are already making money or one where they can live onsite in one of the units. Or you could buy a vacation home that you rent out on a weekly or monthly basis and use for yourself part of the year.

Once you pay off the mortgage on a rental property, it can be a nice source of extra income while you’re still working or during your retirement. So, how you structure a real estate investment depends on your resources, how long you intend to own the investment, and the features of the property that you buy.

Disadvantages of Owning Rental Property

The bottom line is that you have to be completely confident that you can make money no matter if you have higher-than-expected vacancies or lower-than-expected rents and appreciation.

Since the advantages sound so great, I have to give you a dose of reality to balance them out against the disadvantages. Managing investment property and being a landlord is a tough business. I can tell you from experience that it’s easy to underestimate the costs of repairs when you’re repairing a fixer-upper. It’s also hard to deal with tenants who call late at night with a clogged sewer system or who don’t pay their rent. I’ve had tenants disappear in the middle of the night and leave furniture and closets full of stuff for me to deal with. They can damage your property or have problems that they never report to you. Unexpected vacancies can drain all the profitability out of an investment, too. No, being a landlord is certainly not for the faint of heart.

8 Tips for Buying Rental Property

Therefore, buying a rental property or a fixer-upper is a business decision and you need to crunch the numbers for it very carefully. I’ll give you some resources to help you [[AdMiddle]do that at the end of the post. The bottom line is that you have to be completely confident that you can make money no matter if you have higher-than-expected vacancies or lower-than-expected rents and appreciation.

Here are 8 tips for buying rental property:

1. Be sure your personal finances are in order. Never buy a rental property if you don’t have a healthy emergency fund. Remember that you’ll be responsible for mortgage payments and repairs even if there is no tenant.
2. Get preapproved for an investment loan. Sit down with a mortgage lender or broker to find out if you can afford to make an investment before you spend a lot of time searching for a property.
3. Research going rents. Ask real estate agents, property managers, or other renters in the area how much you can realistically expect to charge for rent.
4. Buy properties in good locations. The quality of the neighborhood is important for keeping good tenants. Take a look at the proximity to employers, schools, parks, and public transportation. If you plan to manage a rental yourself, be sure that it’s fairly close to your home.
5. Make purchase offers contingent upon inspections. Always pay to have professional inspections made so you can determine what repairs may be needed and if there’s evidence of pest damage.
6. Get ample insurance. You need to have plenty of liability insurance to protect yourself in case someone is hurt while they’re living in or visiting your rental property.
7. Know the rules. There are federal and state laws regarding rental property that you must not to violate. 
8. Consider the services of a property manager. After years of managing my own rental properties, I turned them over to a professional. Even though a property manager charges around ten to fifteen percent of the gross rent they collect—to me, it’s well worth it. If you want to circumvent all the hassles of managing a property, be sure to add the expense of a professional manager into your calculations before you decide to buy a property. 

There’s no guarantee that real estate values will increase as much in the future as they did in the past. Rents and home prices can go up and down and are very different from one town, or eve