Many Americans are looking for ways to diversify their income without spreading themselves too thin. Investing in rental properties can be a great way to generate passive income, but there are some hurdles you’re likely to face too. If you go in prepared to face the risks, you have an opportunity to make a great profit.
Here are some things to consider before you purchase a rental property:
Do your research on neighborhoods, property values, and local laws and regulations
Finding the right neighborhood is a great place to start. If you buy in the wrong location, you could be setting yourself up to struggle to find tenants. You want a low vacancy rate over time, and you can maintain one by understanding market values and considering incentives for people to continue renting from you.
You also need to know your own legal obligations. What are the landlord-tenant laws in your state that determine lease requirements and eviction rules? Legal issues can add up to big expenses, so know your legal obligations and rights.
Work with a trusted Real Estate Agent
When you are purchasing the building and listing to rent, choosing the right professionals to work with is a big part of a successful strategy. Take the time to understand the reputation of the people you are working with because once you’re a property owner, that reputation will reflect right onto you. That could mean continued profits if you choose wisely.
Have a plan for property management
Whether you are in the same area as your investment property or living in a completely different state, you will want to make sure you plan how to manage the property, make sure things that are broken or dangerous can be repaired and replaced, and that somebody is ensuring your tenants are caring for the home and maintaining value.
Property managers can help you deal with tenants that aren’t following guidelines and expectations, and they can ensure the work needed around the property is done. It will cost more to have property management, but it will save you peace of mind and money in the long run.
Calculate likely costs and returns
Operating expenses generally run between 30% and 80% of the total income of your rental property. Shoot for somewhere in the 50% range and make sure that’s reasonable. This is another reason you want to buy a modest home in a neighborhood that is up and coming rather than purchasing that fixer-upper in a neighborhood that is also in decline.
The same goes for purchasing an expensive home. The more you’re paying to purchase, the more the ongoing expenses will be. It’s better to choose conservatively if you’re a first-time investor.
Make sure you’re not only prepared for regular maintenance and repairs but that you have money set aside for emergencies. A good rule of thumb is to save 20-30% of your rental income for emergencies that crop up.
Buying rental properties can be a smart investment if you go in with your eyes open and make choices that set you up for better returns down the road. The rewards can outweigh the risks if you do your research and take care of your investment.
When you are ready to take the next steps, contact a team member at EPM to help guide you through the process and keep you informed of your options every step of the way.