Rental properties can make for good investments, but they’re not right for everyone.
Understand your investment goals and budgetary limitations before buying a rental property.
You should also prepare for the many risks and management requirements that come with a rental.
Rental properties can make great investments. Not only do they provide steady cash flow, but they also (most of the time, at least) offer solid, long-term appreciation. Still, they’re not right for everyone.
Are you considering investing in a rental property? If so, make sure you ask these five questions before pulling the trigger. Image source: Getty Images. 1. Is it the best investment for your goals?
The first step is to make sure it’s the right use of your money. If you have enough cash for a rental property purchase, you also have enough to invest big in the stock market , purchase some CDs, buy into a mutual fund, and much, much more. You could even crowdfund a development deal if you wanted.
So take a step back and think about your goals for this investment: Do you want big gains on a short timeline? Then a rental property’s probably not your best bet. Do you want steady income or extra cash in retirement ? Maybe an asset you can cash in on down the line? Then rentals can be a smart move. 2. Do you have the cash?
Of course, your rental property will come with an upfront cost — not to mention plenty of closing costs, too. But what about the expenses over time? Do you have funds for repairs, maintenance, and tenant turnover? What about property taxes and insurance? Can you afford to bring in an attorney to draw up a lease and an accountant to handle the books?
You’ll also want a hefty emergency fund saved up. With any property, large, unexpected expenses can hit. If you have a tenant at the time, you’ll need to get those fixed fast. 3. Is it the right time?
The housing market is always in flux. Right now, prices are on a tear, and demand is way up. For those buying a property? These are less-than-ideal conditions — and as an investor, high upfront costs eat into your profits.
A year or two down the road, it’s possible that price growth may slow down, and competition could taper off as well. That would offer a good opportunity to buy low and, eventually, sell high, bringing in a solid profit.
You should also take time to analyze the unique rental market you’re looking to buy in. Are rents trending up or down? What’s the local vacancy rate? You should think about employment numbers and population growth, too. 4. Who will manage the property?
This is the million-dollar question — and one you’ll need to think hard about. After all, rentals require a lot of work. You need to vet tenants, handle maintenance and repair requests, and in many cases, deal with lockouts and other off-hours tasks as well.
Will you do it all yourself? Heck, do you even want to? If you aren’t sure or know that you don’t have the time or patience, figure out who you’ll pass the baton to. There are plenty of property management companies out there that can help, but remember: Hiring one will be an ongoing expense, potentially reducing your returns. Make sure you work those numbers into your plan before buying in. 5. Are you prepared for the risks?
Rental properties come with plenty of risks. For one, you’re tying your earnings to the income of another person. If your tenant doesn’t pay up or pays late, it trickles down to you. It could hurt your ability to pay your bills or mortgage and potentially hurt your credit, too.
There’s also the risk to your property. If your tenant damages the home, that can mean costly repairs, plus a lower property value and reduced return on investment in the long run.
Buying landlord insurance can help mitigate some of these risks. Given the number of nonpaying tenants during the pandemic, rent guarantee insurance isn’t a bad idea either. The bottom line
Investing in a rental property can be a great move — for the right person. Before making such a big purchase (especially of an illiquid asset), make sure you consider all the risks, costs, and work that will come with it, and spend time saving up a healthy emergency fund, too.If you’re still not sure, talk to your financial advisor. They […]