If you’re considering investing in something that will generate income, rental properties could be just the solution for you. However, although it seems pretty straight-forward, buying a property and turning it into a rental involves multiple considerations.
As such, be sure you know the basics of such an enterprise before making any decisions. Likewise, be aware of both the risks and the rewards of purchasing a home and renting it out so you can make an informed decision. Below are some key aspects to consider when investing in a rental property, as well as some of the major pros and cons of doing so.
What to Consider When Buying a Property
When buying a property as an investment, you may be willing to wait for it to appreciate in value over the longer term and then sell it for a one-time profit, or you might prefer to invest in converting it into a rental so you can earn income during the time you own the property.
Among the first aspects to consider is whether you’re ready to be a landlord. To decide which path is best for you, think about what it takes to be a landlord. First, you need to be handy in order to take care of the maintenance. If you’re not or you don’t have time, you need to have a reliable team to do it for you — but that can cost a lot of money and eat up the rent you’re being paid.
Landlords also need to know their legal obligations and be aware of all of the regulations which apply to leasing a property (and they can be city, state or territory, or national). You’ll also have to screen applicants and decide who will become your tenant. Then, you may have to take responsibility for their actions (e.g. with neighbors, a body corporate or owners corporation).
Choosing a Property
If you’re ready to embrace all of the considerations above, it’s time to evaluate the property itself. When choosing a property to rent out, pay close attention to location. For instance, renting in a big city comes with both advantages and disadvantages, so research the rental market in the city, its neighborhoods and suburbs. Then, choose a property in a good neighborhood with plenty of amenities nearby to help ensure you’ll be able to rent it at a profitable rate.
Along the same lines, talk to the potential neighbors. Ask about the state of the neighborhood and the building, and pay attention to the current state of the property. If it’s a fixer-upper, calculate the amount you would have to invest and determine whether it would be profitable in the end. If possible, look for a home with minor problems that are not signs of more considerable, hidden problems. For example, the basics — such as the water system, electrical grid and sewage connection — should work properly. You can also consider hiring building and pest inspectors to make sure your investment is a good starting point.
If you’ve considered all of these aspects and are still ready to make an investment, look into a landlord insurance package, as well. As an investor and landlord, it might be very useful — especially for your peace of mind — to know that you are covered in the event of unexpected scenarios. Find out what the insurance includes (and excludes) and balance the costs to decide whether you should invest in it.
Pros & Cons of Investing in Rental Properties
As with everything in life, this enterprise has both positives and negatives associated with it. Risks include:
- Empty rentals: You might not always find renters for your property. During these periods, you will actually lose money.
- Challenging tenants:Some tenants might be difficult, so be selective when evaluating potential renters. Otherwise, you’ll have to deal with the consequences for the duration of a lease.
- Insufficient funding:The cost of the rent you take in from tenants might not be enough to cover your monthly mortgage and other costs associated with the property, which means you might lose money for a while.
Conversely, rewarding aspects include:
- Appreciation:The property can appreciate in value so you may be able to generate a higher profit as time goes by.
- Passive income: Apart from the duties of a landlord, you can focus on another job. In this case, the rent you receive from the property can turn into an ongoing, almost passive income.
- Physical asset: A home or an apartment is a physical asset. As such, you have more control over it compared to shares, for example.
If you’ve made up your mind and want to start investing in rental properties, make sure to research what this process entails. You can never be over-prepared. Talk to people who have done it and learn about the rental market in the area you want to invest in. Finally, review the evolution of prices, as well as the development of the area, to help make sure you really are investing in a profitable property.
About the author: Mihaela Buzec is a passionate reader and writer with an affinity for language and linguistics, as well as the latest technological developments. She discovered her passion for real estate at RENTCafé, and you can read more of her articles on their blog.
This is general information only and the views of the author(s). It is not financial advice or recommendations, and does not take into account your personal needs, objectives and financial circumstances. Please carefully consider whether this information is appropriate for you.