Tips for Buying a Rental Property
Being a great landlord (and building rental property into a profitable business enterprise) takes knowledge, commitment and sometimes a lot of elbow grease. However, it can be immensely rewarding, and the money is only part of it! Buying a rental property can set an investor on the path to financial freedom, but it requires a lot of groundwork and learning for one to be successful.
Consider Both the Benefits and Risks
The promise of easy extra income may be seductive, but the business is not without risk. It requires attention to detail, and a fair amount of extra work, not to mention some worry along the way. Here are some down-to-earth tips to keep you out of financial ruin:
- Treat your rental property as a business. Your tenants may be nice people, but stick to the terms of your lease rather than let emotions get in the way: Collect late fees if rent isn't paid on time and assess charges if tenants damage the property.
- Learn to do some things yourself. Some ongoing repairs are required, even if your tenants are responsible for routine maintenance.
- Expect the unexpected. You'll be close to the truth if you expect that everything will take twice as long as you think it should and cost twice as much. Systems fail, parts must be replaced, your property may not rent as quickly as you would like. Be prepared to deal with delays and dollars.
- Know that, as in any other field, you will make some mistakes and you will learn from your experiences. There are a wide variety of investment experiences, and some may be fails. Don't overextend yourself, particularly if you are new to "landlording."
- Build up a contingency fund. It's vitally important to set aside some of the rent money you receive. Even if your rental property turns a substantial monthly "profit," don't book that extended vacation just yet. There will be unanticipated costs.
Approach Each Deal with Caution
No matter what your long-term goal may be, every rental property you consider should be a good deal on its own merit. Never think that a borderline property will be a good addition to a growing investment portfolio. An accepted rule of thumb is that rental receipts for 10 months should cover 12 months' worth of anticipated expenses, to include mortgage payments, insurance, taxes, ongoing maintenance and repairs, advertising, marketing and supervision. If you can't make those numbers work, don't buy the property.
Location and property condition are as important, if not more important, for rental properties compared to homes that you live in. Your object, of course, is to buy low, rent for as much money as possible, pay off the existing loan and build equity as well as a passive income stream for your future.
In order to do that, you must stay involved. That means carefully screening prospective tenants, personally inspecting your property on a regular basis, monitoring market trends, and keeping close watch on finances, including escalating insurance premiums and tax assessments that are beyond your direct control.
Buying a first rental property can set a savvy investor on the road to real wealth, financial independence and early retirement, but it takes vision and dedication. It does not happen overnight and it may be one of the ultimate "on the job training" experiences. Successful investors offer pertinent advice for a potential landlord. But almost everyone with rental property also has some not-so-pleasant stories to tell. Minimize your risk by starting small and staying local. As you gain experience, confidence and knowledge, you can broaden your horizons.