Should you buy a rental property? Real estate is one of the oldest ways of building wealth, so it’s worth considering for most people.
That said, here are a few things to keep in mind as you explore if this is right for you.
Buying a Rental Property: The Financials
The main thing to keep in mind when you buy a rental property is for the financials to make sense. Even though you would hope the property will keep appreciating in value over the next few years, cash flow is most important. It doesn’t make sense to buy a house and rent it out if you aren’t able to generate positive cash flow.
When calculating cash flow, keep in mind everything that goes into owning a home:
- Mortgage payments
- Minor routine maintenance
- Major maintenance
You want the monthly rent payments to be able to cover these things, plus a little more. So if you anticipate all of these costs to come out to $1,500 a month, you’d want to target a rent of at least $1,600 so you can make money.
How do you figure out how much to rent out for? There are probably “comps” in the area, other homes similar to the one you’re investing in. See how much they rent for, and if it’d be high enough to cover your costs.
Buying a Rental Property: The Maintenance
As any homeowner knows, maintenance is important. If you don’t regularly maintain the home, you’re going to have problems down the road.
- Gutters full of leaves lead to rain water spilling over the sides, into the home
- Unpainted wood siding gets weak and can start to fall apart
- A chimney that isn’t properly cleaned out can build up soot and cause a fire
- Water heaters should be flushed out once a year to help avoid issues
A lot of things can go wrong. The question is – who will maintain the property? You can’t rely on your tenants – part of why they rent a property is so they don’t need to worry about these things.
That means it’s either up to you or people you hire. So it’s important to ask yourself two questions – Are you willing to roll up your sleeves and do home maintenance yourself? If not, are you willing to pay professionals to maintain the home?
This is important, because it’s either one or the other. Things will go wrong, and your home needs regular TLC. Determine how you’ll handle these things before you buy the home.
Investing in Rental Properties: Should You Hire a Property Manager?
For some investors, a property manager is very helpful. They take care of everything:
- Finding tenants
- Collecting payments
- Organizing and paying contractors
- Paperwork with tenants
You name it, they do it.
The problem is that pesky fee. The average fee for a property manager is 10% of the rent. So if your tenant is paying $1,600 a month, your property manager will want around $160.
Not a big deal, right? Well, that’s up to you. Some people choose to manage it themselves, which takes a lot of time and you must learn many new things. However, it does save you money, especially as you invest in multiple properties.
There’s no right or wrong for everyone. Just make sure you consider if it’s worth the cost to you.
Buying a rental property isn’t easy but it can be worthwhile for the right investor.