After reading countless articles about the benefits of investing in a rental property, you’re finally thinking about buying one yourself. You believe that this endeavor can become your key to earning passive income, building wealth, and enjoying several tax benefits.
Since buying your first rental property is an important and expensive decision, you need to make the right decisions throughout the process. In this way, you can easily narrow down your options and end up buying the best rental property for your needs and financial goals.
Here are five questions to ask before buying your first rental property:
Does A Rental Property Suit Your Financial Goals?
Before buying a rental property, take a step back and assess why you’re making this investment in the first place. Do you want to earn big money in a short period? If yes, then the rental property isn’t the best choice.
Do you want to earn extra cash during retirement or earn a steady income for the long term? Or perhaps own an asset that you can resell in the future? If yes, then buying a rental property is a smart move.
Do You Have The Cash?
Buying a rental property, regardless of whether it’s residential or commercial property, will require a lot of money. Aside from the price, you also need to pay for the closing costs and regular maintenance. Paying for property taxes, insurance, and an attorney to draft a lease can also affect your finances.
Ask yourself if you have sufficient cash to pay for all of these things long-term. Sure, you can always apply for a loan to afford a rental property but keep in mind that other expenses, namely insurance and attorney fees, aren’t covered. Funds for repairs and maintenance will also come out of your pocket.
Is It The Right Time?
Timing is crucial when buying a rental property. Entering the rental market when prices are high, and demand is low will prevent you from earning profits.
It’s vital to understand the lay of the land before you buy a rental property. If you already have a location in mind, take the time to understand its rental market first. Every city or state has a unique rental market, and your ability to earn depends on the condition of that market.
What’s the local vacancy rate of the area? Are more people renting or buying properties? What’s the expected population growth? This information will help you distinguish whether it’s the right time to invest in a rental property.
Who Will Manage The Property?
Buying a rental property requires a long-term commitment. To continually attract and retain quality tenants, you need to make sure that the property is in tiptop condition.
One of the most important questions to ask before buying a rental property is who will actually manage it. You usually have two options for this question: you can either manage it yourself or hire a property manager. Both have pros and cons.
Managing your rental property will require a lot of time and effort because you’ll have a lot of things on your plate, namely handling maintenance repairs, collecting rents, and even serving eviction notices. This can become a challenge, especially if you have to meet other personal responsibilities, such as being a parent or full-time employee.
Hiring a property manager is more convenient as they have the experience and tools to oversee everything about your rental property—from making sure that repairs are handled and tenants are happy. However, hiring a property manager can be expensive and reduce your profits.
Take the time to assess which option is appropriate in your condition. Ideally, you should never buy a rental property unless you know who will manage it.
Are You Ready For The Risks Involved?
Because rental properties provide a high return, expect that there are also a lot of risks involved in this investment. For example, when you invest in a rental property, you need to understand that your financial health will be tied to another person’s income. If your tenant doesn’t pay on time, your ability to pay your mortgage and bills will be affected.
There are also risks to your property. If tenants damage the property, you’ll need to spend money on repairs. If the damage is too severe, your rental property might have a lower value, resulting in a lesser ROI or return on investment in the long run.
Before buying a rental property, make sure that you’re aware of the risks and how to minimize them. The more prepared you are, the better.
Don’t Make Hasty Decisions
Buying a rental property is a great way to create wealth, but only if you’re fully aware of the costs, risks, and responsibility it’ll require from you. Contrary to popular belief, having sufficient capital isn’t enough to succeed as a landlord.
Before buying a rental property, ask yourself the questions presented in this article. Your answers will help you understand rental properties and assess if investing in one is the best option for you right now.
