Investing in rental property has long been a popular option for people who want to diversify their investments beyond stocks and mutual funds. But, unlike those more mainstream investments, rental properties can require significant hands-on work, including dealing with tenants and keeping up with maintenance.
You have to be smart to make rental investment pay.
While investing in real estate is often referred to as “passive income,” there is nothing passive about it. Mutual funds don’t call when the toilet is stopped up.
Finding rental property that yields a positive cash flow may take some searching.
A Good REALTOR may be your best asset. Looking for a building that’s a little rundown but in a good neighborhood, provided you have the money to improve the property.
Here are six things to do before you buy rental property!
Gather as much information as you can.
Talk to other investors, mortgage brokers and real estate agents who have worked with income property about what owning a rental property is really like, in addition to reading books and articles on the topic. It’s all about obtaining knowledge!
Decide if you’re ready to be a landlord.
Buying and managing property yourself provides the greatest return but also the greatest headaches. Do you have the stomach for being a landlord? Stuff is going to happen that just really ticks you off. Other, less active options include becoming a partner in a limited liability company that owns properties or buying into a real estate investment trust.
Crunch the numbers carefully.
A rental property is only a worthwhile investment if it makes money. Yes, the property may rise in value and yield a profit when you sell, but it also may lose value depending on which way the market goes. If you’re banking on just appreciation maybe rethink your strategy.
Make sure you have enough cash.
Getting rich on real estate with no money down is a great dream, but it’s almost impossible to accomplish. Expect to need a sizeable down payment, reserves to pay for repairs and maintenance and a good income before you start investing.
Consider a live-in property.
If you’re buying a home for yourself, buying one with up to three additional units can be a good way to get started with investing. Duplex, Triplex, and Quadplexes are still considered Single Family Residential and can be bought with most FHA financing.
Plan for hands-on management.
In the long run, you may decide to pay someone to do the day-to-day management of your property, including dealing with tenants and arranging for repairs. Costs vary, but you should estimate paying about 10 percent of the rents collected for this sort of service. But you will still need to be there at the beginning to make sure the building is in tiptop shape and the tenants are dependable.
