A lot of people look to owning property as a potential source of passive income, especially as they get older and want to have more than one stream of income before they retire.
However, getting rental properties can be complicated, and it’s important to do your homework and make sure you understand what is required before you commit to being a rental landlord.
Remember, there are also other ways to invest in real estate other than just buying a property you intend to rent. So if being a rental landlord, and all the responsibilities and commitments that come with it aren’t for you, then there are still lower effort alternatives that can work just as well.
To help you decide what kind of real estate investment is right for you, here’s what you need to know about buying rental property, how it works, and what to expect from the properties once you own them.
Are Rental Properties A Good Investment?
The truth is that, like all investments, buying rental properties comes with some risk. Some properties are riskier than others, while some have very low risk, but might not offer the kind of rewards you really want from an investment.
It’s important to evaluate each property you’re considering, and to take into account the unique risks and potential rewards for each kind.
For instance, rental homes are often the first thing people consider when they think of rental properties. But homes often come with a lot of maintenance and need constant upkeep to stay in good condition. That’s not just on you, but also part of the responsibility of your tenants. Have tenants who aren’t willing to keep things in good condition and you could wind up spending a lot more than you earned on their lease getting the property fixed up and ready for its next renters.
Office rentals, on the other hand, usually need less maintenance overall, but maintenance is usually more expensive when it does need to happen. In addition, you might need to hire a weekly or monthly cleaning service and other service providers to help attract tenants, depending on the size of the office space and whether you’re renting to a single tenant or many.
At the end of the day though there are five main things you need to evaluate about any rental property to tell if it’s the right property for you:
- Cost of the investment
- Potential profits
- Potential or guaranteed costs
- Condition the building is in
- How much management time the building requires
Number five is a big one that a lot of first-time rental investors don’t consider before they buy their property.
Owning a rental property can be time-consuming, especially if you have more than one tenant making demands or have to consider the needs of a lot of different kinds of rentals. Generally, the larger the rental or the more profit potential that property has, the more management time it will need.
Of course, some investors choose to hire a rental management company to take care of their properties for them, but that cuts into your earning potential since at least a portion of the profits are used for management fees.
It’s also important to consider building condition for rental buildings because the condition can point to a lot of expenses down the line. Even a building in good condition on the outside could have hidden problems like an outdated or failing water heater, a bad HVAC system, or hidden water damage that can result in mold and worse problems.
You should also pay attention to what interest rates are doing when you decide to invest. For rental property owners, increasing interest rates can be a good thing for your bottom line.
What Do You Need To Know Before Buying Rental Property
Here’s what you need to know before you start buying rental property, beyond just evaluating the quality of the potential investment.
Understand Your Financial Situation
The first thing you need to understand is your own financial situation. Are you ready to start investing? If so, are you ready to invest in rentals? Most rental properties get more profitable over time, but you could start making just a few dollars a month with some properties.
A lot of people think of rentals as a good way of making passive income, but that just isn’t always true in the beginning. You’re most likely to put a lot of work in, for minimal return, in the beginning of owning a property. After a while expense will get more predictable, but it won’t happen immediately.
It’s important to make sure you’re financially ready to start investing in real estate before you get started.
The Current Or Potential Profit Potential Of The Building
The next thing you need to know is how much you’re likely to make on a potential rental property.
There are a few things you should know to evaluate the earning potential of a given property:
- How much is the current or anticipated rent?
- How many tenants can the building support?
- What immediate maintenance or repairs does the building need? How much will your upfront maintenance cost?
- What are the anticipated ongoing maintenance costs? You can use the current maintenance costs to estimate maintenance costs for pre-existing buildings.
These numbers will help you determine how much money you need, above and beyond the original purchase cost, how much you can expect to earn in an average year, and roughly how long it will take to make back the money you spend on your original investment.
Local Tenant And Landlord Laws
A lot of tenant and landlord laws are state-by-state. There are some broad similarities between the laws, but it’s important to make sure you’re familiar with the local requirements, and the different kinds of responsibilities for different kinds of landlord-tenant relationships.
For instance, your responsibilities as an office landlord are probably very different from the responsibilities you would have as a home landlord.
You need to know these requirements not simply to make sure you’re meeting them, but also to make sure you’re prepared to meet your obligations for that kind of property.
The Condition Of The Property
Having a thorough inspection before you buy rental properties is one of the best ways to protect your investment and to make sure you’re prepared for the kinds of upfront and ongoing costs you need to expect for that property.
It’s also important to make sure the inspection is done by someone who understands that kind of property and the sorts of hidden damage and problems that are more common,
How Much Maintenance Is Typical For This Kind Of Property
Another important thing to understand before you know if a rental property is right for you is how much maintenance is typical on that kind of property.
For instance, some states require that you change the carpeting in rental housing after a certain number of tenants or years, whichever comes first. That’s typical maintenance that’s going to come up regardless of how well the rental is cared for.
Knowing what kind of maintenance requirements exist, and how much typical maintenance will cost over time is critical to making sure the profits from that rental property are worth the potential risks.
How To Tell If You’re Financially Ready To Buy Rental Property
There are a few things you need to have in order before you’re really ready to buy a rental property. For one thing, you need to have enough resources to start saving and have a reasonable amount put aside for your retirement already.
While rental properties can help you fund your retirement, you should already be on your way to having a stable retirement just because of the risks involved in having investments.
You also need to have enough money to make a reasonable down payment on any properties you’re considering. That means that the size of your down payment can and should have a big impact on the kind of property you consider.
You should also make sure you have the resources to handle closing costs, immediate maintenance needs, and to support the building for at least a few months before it starts turning a serious profit.
How Profitable Are Rental Properties?
The profits you can get from a rental property really depend on the property, its location, and the local market for that kind of rental.
In general, the best properties for profits are high value, in high demand areas, with a stable real estate market and a diverse local economy. But those are also the properties that are most likely to be expensive.
Any rental property, properly evaluated and with the right kind of work, can be profitable. It’s up to you, or your real estate agent, to find the best opportunities.
If you’re looking to get your own rental properties, contact Teifke Real Estate, we’ll help you evaluate the potential options, go over the pros and cons of each property, and help you find the perfect property to own.