If you are thinking about investing in a rental property, there are a few things you may want to consider before jumping in head first. Investing in a rental property isn’t something you want to take lightly and can be quite challenging. However, with adequate due diligence and proper guidance it can be extremely rewarding.
As a beginning investor in rental properties it is important to learn how to assess the value of properties, choose the right location, understand the market conditions and most importantly, find great tenants. The ability to execute the previous criteria can better prepare you to benefit from owning a rental property.
Benefits of Renting:
- A Passive Income Source: When people think of investing in a rental property one of the biggest benefits that comes to mind is generating a passive income. Reoccurring income that requires little effort to maintain sounds like a dream to anyone! Rental income is also taxed differently than employment income which may be of interest to some. You will want to work out all the financials ahead of time to make sure that investing in a rental property is going to be profitable for you by factoring in all the expenses and calculating potential income on the property before making the purchase.
- Sense of Security:
Whether through inheritance or temporary work relocation, many people find themselves with additional property. Renting that property to good tenants provides a higher sense of security than allowing it to sit vacant for extended periods of time. Vacant homes are more susceptible to vandalism, squatters, and potential maintenance issues that could go unnoticed and turn into a larger issue. By having renters, you have someone on the property that can keep on eye out for those potential threats towards your investment and give you a greater peace of mind and a greater sense of security.
- Sense of Security:
- Flexibility: Owning a rental property may give you the flexibility to move into a home that is better suited for you and your family. If the market conditions are not the best, rather than selling your current property, you could rent it out until the market is more favorable to your situation. Renting out your property gives you the flexibility to sell when you are able to make a profit. Likewise, If you need to make a move due to a job relocation or a financial situation, you may be able to rent out your property and know that you will still have a place when you return!
- Appreciation: Going along with a few previous points, renting out your property lets you told hold onto it and allows it to gain appreciation and property value. This lets you have the freedom to sell the property once it has reached a point that you are comfortable selling. If you are looking to purchase a property to rent out, looking into neighborhoods and researching the potential for it to appreciate may be of some interest to you.
- Diversification: Hopefully you have money invested in a 401k, in the stock market, or just put into savings and slowly watching it grow. Owning a rental property gives you a more diversification of investments. You know the saying, don’t put all your eggs in one basket! Having an array of investments creates a certain level of protection against risk and simultaneously help you take advantage of a positive market flux.
If the benefits of investing in a rental property are what you are seeking, it is important know which features will help you make a profit. There are several features that you may want to consider in order to boost your chances of finding great tenants and help make your rental stand out from the rest.
What to look for when investing in a rental property:
- Start Small: If this is your first investment property, keep it small and affordable such as a single unit or home, not an entire apartment building. As a suggestion, try to avoid properties that need significant repairs that could cause you to overextend yourself and your budget. You also may want to consider using a property manager until you feel more comfortable with the process.
- Location: As mentioned previously in benefits of owning a rental property, a good location is key for long-term equity growth. You will want to research rents in the area in multiple conditions, as-is or with repairs and improvements, so you can cater to more people and be in higher demand. Location can often impact the quality of tenant that you attract which translates into overall revenue. Try to find a place that has desirable qualities to the type of renters you are trying to attract. For example, school and neighborhood, walkability to shopping, parks, or hiking, proximity of potential employers or major employers. In Arizona there are many high profile events to take into consideration as well. People tend to travel to spring training and the Phoenix open and could potentially be a great source of revenue if you are looking for more periodic renters.
- Transportation: You may want to consider investing in a property that is close to public transportation and/or major highways. Many people prefer direct access to routes that get them to desired locations such as work, shopping, and entertainment. Likewise, pay considerable attention to parking arrangements and try to acquire a property with off-street parking or if in an urban environment, a property within relatively close proximity to a parking garage.
- Utilities: If looking at a multi-unit building, it is more convenient if there are separate utilities associated with each unit. This will help break down the cost per unit and aide in managing how each renter is charged. This will also give you a better idea at the costs and breakdowns so you are not taking on those additional fees. This is where running the numbers over and over again comes in handy. It is important to know your property in order to make it a good investment. Your monthly expenses may not only include the mortgage or debt service, taxes, and insurance but also lawn and pool maintenance, property management (optional) and insurance. Keep in mind vacancies, turnovers and evictions for those are real circumstances every landlord deals with. It is safe to assume at least one month’s loss of rent annually.
- Property improvements/repairs: After investing in a rental property it is best not to over improve the property with all the best upgrades. It is wise to keep your cash flow at optimal levels and to not spend too much on upgrades for a rental property that you will most likely need to spend on routine maintenance and repairs throughout the year as well as during turnovers. Keep in mind large maintenance issues that may arise such as roofing, air conditioning, heating, plumbing and piping or electrical. Remember that repairs on rentals may be expensive and unexpected so it is prudent to keep a an emergency fund from the profits you make to handle any situation that you may encounter.
- Renters/Tenants: Choose your tenants wisely! A lot of damage can happen in a short amount of time. A good way to prevent something like that from happening is to visit your property frequently and be careful when selecting tenants. Cherish good renters and make savvy business decisions. One great renter may be worth more to you than an increase cost of rent if they have proven to care for your property as if it were their own. Having that peace of mind might just be worth the raise in rent. A great tenant will tend to require less repairs throughout their lease and will leave less wear and tear on your property when they eventually move out.
As you can see, investing in a rental property has many benefits as long as you are prepared to take on the challenge. There are many risks that may come with a real estate investment but there are also many ways to help mitigate those risks. One of those risks is renting to a bad tenant. The best thing you can do to protect yourself and your property is to implement a thorough screening process by checking their credit as well as their criminal and eviction history. This will give you a better idea at who they are and how risky of a business move it would be to rent to them. There are multiple agencies that offer in depth reports and reliable tenant screening processes to help you pick great tenants for your property.
Of course these are just the basics and there is so much more to look into as an investor and potential landlord. This is why we would advise you not to try to learn things the hard way and to ask your trusted realtor who has the experience and knowledge to help you succeed!