If you’ve saved some money and want to put it into a rental property, excellent! Real estate can be a very profitable investment, and renting out a property is a great way to get a consistent income stream separate from your career, which can lead to more savings, a more comfortable lifestyle, and even early retirement. Before you purchase a rental property, however, there are several things you need to avoid to ensure that you’re getting a good property that will make you money instead of suck you dry.
High Property Cost, Low Rents
Before you purchase a rental property, you need to carefully research the area and find out how much houses cost and how much they rent for. Not all locations are created equal, and purchasing in some areas will lose you money. To figure out profitability, look at how much the property will cost you per month if you get a traditional 30-year mortgage after 20 percent down, including taxes and insurance (if you’re purchasing the house without a mortgage or using a different formula, this information can still be useful just to look at your return on investment). Compare this amount to current rents.
You can’t just look at those two numbers to ensure that you’ll be making money, though. You also have to account for vacancies, property management (if you aren’t taking care of it yourself), and repairs. If your monthly mortgage cost is half of current rents, you’re safely prepared for all additional costs, according to conservative estimates. As the gap closes, you’re putting yourself more at risk.
Too Much Damage
A good way to make a property more profitable is to purchase one with some damage and fix it, raising the amount of rent you can get for it and improving its selling price when you eventually sell it. However, these bring up-front costs, which you’ll need to pay for out-of-pocket, and if you want to leverage your money, property damage can make it difficult or impossible to get a mortgage. Before you put on offer on a house with a large amount of damage, ensure that you can pay for the necessary fixes and all costs until you can get it rented and start reaping the rewards.
In most every area, there are locations that are considered to be better than others, and these areas usually come with higher rental demand, which leads to higher rents and a larger pool of tenants. If you have multiple tenants to choose from, you can be pickier and get someone that has better credit and good rental history, meaning they will be much more likely to pay their rent on time and consistently. A bad tenant can cost you more money and time than you might imagine.
Dangers to Tenants
There are certain property problems that can cause tenant injuries, and you want to avoid these as much as possible to keep you out of court. Check that the concrete doesn’t have any large uneven cracks – ones caused by tree roots can get worse over time and should be avoided – any cellars or other dark areas have proper lighting, all stairways have handrails, etc.
It’s also a good idea to avoid properties with pools, even if they’re properly fenced, since they’re expensive to keep nice during tenant turnover and can be a huge liability risk. You can’t guarantee that you won’t get sued, but you can definitely minimize the chances by choosing a property that doesn’t have these types of dangers.
Rental properties can be incredibly profitable and great investments, but you need to know what to look for and choose the right property that will get you a great return on your money and will provide a solid income stream for as long as you have it.
Author Robin Wright is an avid real estate blogger.