Real Estate

3 Things to Consider Before Buying a Rental Property

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Ready to become a landlord? Owning rental property can mean a regular stream of relatively passive income when done carefully; some people even make this income part of their plan for retirement. Before you take that leap, here are three tips to take into consideration to help ensure your success.

Managing cash flow 

The most important thing is not to overextend yourself financially in the near-term. Vacancy rates—time between tenants when no rental income is coming in—can cause some landlords a significant hardship. Make sure you can cover the mortgage from your own finances for at least three months, just in case your unit takes time to rent.

While homeowners can often get into their own homes for little down payment, an investment property requires a minimum of thirty percent down. Since this can be a significant cash outlay, one good alternative is to use equity to buy second property. This will leave your cash reserves virtually untouched in case you need it to cover high initial vacancy rates.

Build capital repairs and routine maintenance into your annual estimated expenditures. One of the biggest is roof replacement, so estimate the cost and length of time until it will be necessary, and then come up with a financial plan to cover this and other critical eventualities. Keeping your rental property in good repair is one of the cornerstones of maintaining low vacancy rates and maximizing rental income.

Buy where the need is 

What makes up the largest rental demographic in your community? College students, tourists, and factory workers who need homes close to where they work are just a few groups who might be interested in your rental. You cannot discriminate against applicants, yet you should make sure the property you buy is appropriate to the need in that area. College students are likely not going to be interested in a top-dollar rental, but medical professionals might if the property is near a hospital.

If the property is near a popular tourist location, it might be more profitable to utilize the property as a weekly rental instead of a month-to-month. Figure out where the need is greatest, and look for properties that meet the criteria of your target demographic to ensure there will always be plenty of potential tenants interested.

Due diligence on tenants 

Familiarize yourself with important regulations like Fair Housing Laws and the Landlord and Tenant Act and investigate your state’s regulations as well. Once you understand what is legally necessary to communicate to tenants, set up a consistent process applied to all tenants equally to investigate their rental history and potentially uncover any red flags. Verify all information listed on the rental application, take the time to speak with references, and complete employment verifications.

Document and file every interaction, especially if you find information that will cause you to reject an application. You will be making a significant financial investment, so expend every effort possible to make sure you get the right tenant onto your property. This will reduce the likelihood of costly problems down the road, like property damage or eviction processes. Communicate clearly and proactively, always giving tenants plenty of notice before upcoming actions such as inspections or lease renewals. Also, seek routine feedback to help identify issues before they impact your budget.

If you combine a financial plan that effectively manages cash flow with the perfect kind of property for the area, as well as some elbow grease and due diligence, your first investment property can contribute to your financial well-being for years to come.

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