Intuitively, you know that a rental property is only “worth it” if it makes you money. Yet there’s a lot more to consider before investing in property than how much you can charge for rent. Here are three things you need to know before investing in a rental property.
1. Understand How Much Money You Stand to Make
The old adage says that real estate is one of the safest investments because it always goes up. That’s not entirely true, nor does it mean that any investment property is a good value. Before you even consider making an offer, crunch the numbers.
While you hope the property will improve in value and yield a profit when you sell, so much depends upon the market. If the real estate market is overinflated, then you could just as easily lose money should the market tank before you sell.
Look carefully at the amount you’ll need to put down for the deal as well as any work that would be required for repairs or maintenance. If you need to renovate before you can rent a property, you could be looking at covering several months of expenses while getting work done. Only then can you start to recoup your costs. If you don’t have enough cash to cover repairs and the mortgage, the house isn’t a good fit for you.
2. Understand the Property’s True Condition (Location Included)
Savvy real estate investors never take a listing agent’s word for it about the condition of a home. They hire a home inspector who checks out all the systems and provides an independent assessment of the home’s state.
While no home will be in perfect condition, make sure that you’re not taking on more than you can afford before committing to a purchase. Pay close attention to things like termites and pest presence, water damage, mold and mildew, and structural issues.
A home inspector can alert you to code violations, which usually must be fixed before a sale can proceed. In some cases, you can live with a code violation until you make repairs to the area (say, adding GFCI outlets to a kitchen when remodeling). In other cases, you’ll need to pay out of pocket for the fix or negotiate a concession from the seller.
While not strictly part of the home’s condition, the neighborhood is too important to ignore. If the property is in an area that lacks public transit or has high crime rates, you may struggle to attract tenants.
Get a feel for neighbors, too. Communicative neighbors can be important, especially if you’re managing the property from a distance. But a busybody can be the sort of neighbor who is always complaining—driving your tenants away and driving you batty with constant phone calls about “issues.”
3. Understand What it Takes to Manage a Property
Being a landlord may look easy, but there’s a lot of work that goes into managing property. But you don’t have to do the work yourself—that’s what property management companies are for. However, if you hire one, you’ll have to give them anywhere from eight to twelve percent of the monthly rent. If you know you want to outsource property management, deduct the cost of hiring a property manager from your anticipated income to understand how the decision affects your cash flow.
If the numbers look good, the property is in good shape, and you understand the work involved, dive into the deal knowing you’ve done all the due diligence possible to make the move a profitable one. If things don’t check out, keep searching. There are plenty of investment properties, and it’s only a matter of time until you find yours.