What to Know Before Buying a Rental Property

what to know before buying a rental property

Looking for a way to make a little extra income? Buying a rental property may be the right strategy for you.

Rental properties are a great way to earn extra income to put towards your retirement, vacations, or hobbies. You get to be your boss, set the rules, and decide how best to manage your properties.

Before you get too excited, owning a rental property isn’t the luxurious and fast money-making scheme the TV shows make it out to be. There are many aspects to buying and owning a rental property you need to consider. Renting a property offers many rewards, but like with any investment, there are also risks.

Here’s what to know before buying a rental property and how you can benefit from your investment.

Research the Location

Properties in desirable neighborhoods and locations are less likely to remain vacant. A vacant property will end up costing you money. When buying a rental property, make sure it’s in a safe neighborhood respectable tenants will want to live.

Research the area or areas you’re looking to buy a rental property and consider:

  • School districts
  • Crime rate
  • Convenient amenities
  • Rental costs in the area
  • Rising, falling, or stagnant property values

Investing in a rental property in a safe and desirable location will ensure your property always has tenants.

Calculate the Income

You want to invest in properties that will offer a good income. Any property you buy should follow the rule of 1%. This rule states that the monthly income of the property is at least 1% of the property’s total cost.

This rule is a guideline. Some properties that follow this rule might not be a good investment while others with less income may be a great investment.

Property Expenses

Becoming a landlord means knowing how to estimate and plan for expenses. Estimate that expenses will consume about 50% of your gross income each year. If you make $14,000 in rental income per year, the property could sustain $7,000 in expenses.

There are operating expenses that include paying for the mortgage, insurance, and maintenance. This can include property management services and vacancy costs. Capital expenditures include unplanned expenses such as replacing faulty appliances, fixing a roof, or plumbing costs.

Benefits vs Risks of Investing in a Rental Property

Rental property investments offer many benefits in addition to adding to your income. These benefits include:

  • Gain a passive income
  • Enjoy tax deductions on rental properties
  • Rental property appreciation
  • Diversify your investment portfolio

The benefits of buying a rental property come with several risks that you’ll need to consider. The risks include:

  • Renting to a bad tenant
  • Damaged property
  • Vacancies
  • Losing money on the rental property
  • A decrease in property value

Before you decide to buy a rental property, weigh the benefits and risks. Knowing the benefits and risks associated with your rental property can help you understand what to expect from your property investment.

Is Buying a Rental Property the Investment for You?

Buying a rental property is a great way to earn a stable income while diversifying your portfolio. While most investments come with benefits and risks, buying a rental property can offer more benefits if you know what to look for. Follow these considerations to ensure your rental property will be a great investment with real high ROI!

Do you want to invest in the real estate industry? Check out our latest Real Estate articles to learn more great investment tips and tricks for rental properties, mixed use property, or house flipping.