Real estate investing can be a superb way to earn a somewhat passive income, but it doesn’t come without risk. Prior to spending your hard-earned dollars on a rental property, educate yourself about the rewards and pitfalls of renting.
Real estate investing can be a superb way to earn a somewhat passive income, but it doesn’t come without risk. Prior to spending your hard-earned dollars on a rental property, educate yourself about the rewards and pitfalls of renting.
Real estate investing can be a superb way to earn a somewhat passive income, but it doesn’t come without risk. Prior to spending your hard-earned dollars on a rental property, educate yourself about the rewards and pitfalls of renting.
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Make Sure You Can Afford to Purchase a Rental Property
Real estate transactions are not the type of thing you want to jump into headfirst. It can be disastrous and expensive if you purchase prematurely.
If you’re financing the purchase if a rental property, your lender may require a larger down payment. You may also have to carry additional insurance policies.
The interest rates on a rental property are also considerably higher than interests on a traditional home mortgage loan.
Understand that each financial institution has different mortgage offerings, so shop around and find the lender with the best terms and conditions for borrowing funds to finance a rental property.
Property taxes can also be a costly and unpleasant surprise -even triple what you pay on your personal home. Remember, rental property is subject to different laws than your personal residential property.
Don’t pull the trigger on a purchase without first being very clear about the real estate laws and property taxes in the area where you’re buying.
On the plus side, as property values increase, so can the amount of rent that you charge. And, you have the option to sell when the market peaks.
If you have to deplete your savings or dip into your kids’ college funds, if you have significant debt or student loans, you’re not yet ready to become a landlord.
After you purchase a rental, you should still have a nest egg, 3-6 months’ worth of expenses, and a personal emergency fund.
There will always be unexpected maintenance and repair costs with a rental property. As the landlord, you’re responsible for paying those expenses.
You’ve also got to be prepared for those cases when tenants might miss a payment, bail on their lease, or damage the property during their stay.
Essentially, you need to be financially positioned to carry two mortgages, two or more home insurance policies, property tax on both houses, and all expenses in case your property doesn’t rent or tenants fail to pay. You’ll also need a budget for damage and repairs.
Are You Ready to Be a Landlord?
Being the landlord of a rental property has lots of benefits, but there are also downsides. For example, as the owner of the property, you are responsible for any repairs or damage.
This responsibility means that when something breaks, you need to either fix it yourself or hire someone to fix it for you. And you never know when a problem will arise.
If your rental is out of town, or if you’re not handy with a toolbox, making repairs yourself may be too challenging, so you have no choice, really, other than to hire a professional — and you can’t supervise their work from a distance.
Another trick to managing tenants is to maintain your standards and don’t back down. You may have a tenant that asks for a grace period one month, and then makes a habit of it.
Try to avoid the temptation of befriending your tenants or being too lenient. Stay firm in your business practices.
There is a work-around, though. You can hire a management company that will maintain the property for you.
You have to make sure the property is in rentable condition, but a property management company will take care of finding tenants, collecting rent, and arranging for contractors when needed. Of course, this cuts into your profit at the end of the day.
You may also ask yourself if you’re aiming for a long-term tenant or if you intend to use the property as an Airbnb.
Know the Real Estate Market
You’ve determined that you’re financially prepared to carry two mortgages or pay cash for a property you’ll rent to tenants. You’ve also concluded that you’re ready for the responsibilities associated with being a landlord. But it’s not time to shop properties just yet.
First, you’ll want to research the areas in which you’d like to buy. Some neighborhoods have a proven history of renting well, while others struggle to find and keep good renters. Don’t just look for the cheapest house; you might potentially lose money on the deal.
Understand that there’s a buyer’s market and a seller’s market. You want to buy your rental property in a buyer’s market.
A buyer’s market is a scenario in which there are more properties available for sale than there are house-hunters interested in purchasing. In a buyer’s market, you have more flex room to negotiate lower prices. Sellers may be more motivated to sell to avoid their listing becoming stagnate.
A seller’s market, on the other hand, is when more people are searching for a house to buy than there are available properties. A seller’s market inspires more competitive offers, fewer contingencies, and maybe even a bidding war to inflate the selling price.
Move-in-Ready or Fixer-Upper?
When you begin scouring for the right property, ask yourself if you want to save money by purchasing a house that needs repairs and upgrades, or do you want a home that is ready for tenants immediately?
If you’re searching for a fixer-upper, make sure to have the property inspected. You don’t want to suffer from buyer’s remorse because there turned out to be more problems and expenses than you’d bargained for.
Buying as-is can prove to be an expensive mistake if the cost of repairs eats into your profit.
Find the Right Real Estate Agent with Experience in Rental Properties
Real estate agents specialize in various areas. Certain agents specialize in finding good investment properties. Seek out someone who knows how to handle the type of transaction you’re making.
Read real estate agent ratings and reviews. The Internet has allowed people to be blatantly honest with their opinions, so use that to your advantage.
Interview real estate agents. When speaking with them during interviews, you’ll gain a feel for how they communicate. Are they eager to answer your questions? Do you feel intimidated? Are you comfortable with the agent’s response time to emails, phone calls, or text messages?
A good real estate agent should put your mind at ease, help you feel prepared, negotiate a good deal, protect your interests legally, and assist you in having a positive experience when buying your rental property.
Conclusion
Buying a property to rent out could turn out to be a game-changer. Either your investment will perform well and bring in good earnings, or you’ll struggle to maintain it physically, mentally, or financially.
To succeed, make sure you’re financially prepared to invest in real estate. Don’t take unnecessary risks.
Know what your responsibilities will be as a landlord in terms of the law and maintenance and repairs and decide if you’ll do those things yourself, hire a team of contractors or allow a management company to handle those things or you.
Research the areas you’re interested in. Look for low cost, high rental rates, and low crime.
Work with a highly qualified real estate agent who is experienced in locating rental properties for investors.
Have Questions? Ask Lindsay!
Give Lindsay Rice a call today at 703-223-8676 to set up a time to discuss your current and future real estate goals in regard to buying or selling a home. We look forward to working with you to make your goals a reality.
