The slowly recovering housing market has had one significant upside for real estate investors: housing prices are lower than they have been in years. Couple that with the fact that there’s a big need for rental units in many areas of the country, and you’ve got the perfect opportunity to make money in rental real estate investments. After all, what could be easier? Buy rental property when the prices are low and collect enough rent to pay off your mortgage plus put a little extra in your pocket each month.
If only real estate investing really were that easy. If you’re thinking about buying rental property as an income booster, it’s important to understand the realities of being a landlord. Before you take the plunge into real estate investing in rental property, consider these factors.
7 Things to Know Before Investing in Rental Property Real Estate
The Three Most Important Things to Consider
You know the drill, real estate investors. Sing it with me: location, location, location. The single most important thing to consider when buying rental income property is location. The location of your new rental property will have a lot to do with your success, as well as with the type of renters you’ll attract. Consider who you want to rent to, and how much you want to be able to charge. Do you want to rent to families with young children? Choose an area with playgrounds and good elementary schools, and a property with 2-bedroom or larger units. Families with school-age children? You’ll want a property in a community with good schools and units with at least 3 bedrooms. Young professionals? They may be the most attractive rental market of all – and consequently, you’ll pay more for properties that attract them. But you’ll also find that they’re generally the least trouble. On the other end of the spectrum, renting to college students can require a lot of energy and work, but the profits can be significant if you can manage to rent a 4-bedroom unit to four college students at $400 per student.
When choosing rental income properties, consider the availability and demand for rental properties, the types of rental properties that are in demand and the prevailing rents in your area. They’ll all give you a better handle on whether rental income property is a good real estate investment for you.
Where’s the Money Coming From?
Mortgage interest rates are at exceptionally low levels right now, making this a good time to be looking at rental properties – or any real estate investments, really. Keep in mind, though, that the rates and loans available to you can vary widely depending on whether you’re planning to occupy the home or not. In general, if you’re planning to buy strictly for the investment income, you’ll probably have to come up with a higher down payment and pay a higher interest rate. If you’re just starting out in the field of real estate investing through rental income, you can save a considerable amount of money by purchasing a multi-family residence and living in one of the units. You’ll qualify for loans at the lower owner-occupied rates, take in rental income to help cover the mortgage and save money on your own rent or mortgage payment.
It’s a Taxing Problem
When you purchase rental income property as an investment, there are significant tax considerations. In most states, you won’t get the tax advantages you’d get if you lived in the property yourself. Check with your local tax assessor to find out about recent taxes for the properties you’re considering buying, and ask about any upcoming changes to the tax rates that might affect the amount you’ll be paying for taxes on your new property if you should buy it.
Hammering It Home
A major factor to consider is your own DIY skills. As a landlord, it’s your responsibility to keep things in good repair around the property, and that applies to everything from a stopped up toilet or a torn screen all the way up to a leaking roof or a failed furnace. Just about anything and everything on your property may need repair at some point, and if you can’t fix it yourself, you’ll have to pay someone else to fix it. Before you buy, get a solid home inspection done and seriously consider any potential problems and what they may cost you to fix.
Fill ‘er Up
A vacant rental property is a drag on your income. Every month that a rental unit sits empty is a month you’re losing money. Before you decide to buy, consider the costs of keeping your rental investment property full with tenants. Some landlords take care of the advertising and screening on their own, while others pay a property management service to deal with screening tenants, collecting rents and dealing with repairs. If you’re buying rental investment property in another city, that may be the best way to handle the situation.
Setting the Rent
Deciding on the rent you can charge has two parts: how much you need to get and how much you can get. Before you purchase a rental income property, total up your costs for mortgage, taxes, insurance, property management, association costs and other expected expenses. Research typical rents for similar properties in the same area – and be realistic. A sparkling, modern efficiency condo unit in a brand new building with a water view can easily command a higher rent than a 3-bedroom second-floor apartment on the wrong side of the street. Even properties in the same building can bring in markedly different rents depending on their location and condition.
Don’t overlook special rental scenarios, like vacation rentals. While homes, condos and cottages in high-traffic tourist areas can be expensive to buy, they can also generate a lot more income than a year-round rental. Depending on the area, the specific location and the amenities you can offer, you can often get the equivalent of a month’s rent for every week during the tourist season, and regular rent during the off-season.
Rental property can be a lucrative real estate investment, but it can also be high-maintenance and expensive. Take the time to think through all the possible scenarios you might encounter and you’ll be far more prepared to be a successful landlord.