Buying an investment property is a great way to earn extra income and build long-term wealth. However, there are many considerations that go into buying your first investment property, especially in the current real estate market.
11. Beware of High Interest Rates
The cost of borrowing money might be relatively cheap in recent years, but the interest rate on an investment property is generally higher than it is for a traditional mortgage. If you do decide to finance your purchase, you need a low mortgage payment that won't eat into your monthly profits too much.
12. Invest in Landlord Insurance
Protect your new investment: In addition to homeowners insurance, rental property owners should always purchase landlord insurance. This type of insurance generally covers property damage, and some even cover lost rental income, and liability protection—in case a tenant or a visitor suffers an injury as a result of property maintenance issues.
Keep in mind that standard homeowners insurance policies may not cover losses incurred while the home is rented out. Contact your insurance agent to make sure you are adequately insured.
13. Factor in Unexpected Costs
It's not just maintenance and upkeep costs that will eat into your rental income. There's always the potential for an emergency to crop up—damage from a flashflood, for instance, or burst pipes that destroy a kitchen floor. Plan to set aside 10% to 20% of your rental income for these types of costs so you have a fund to pay for timely repairs.
14. Is buying a condo a good investment?
Condos can be a good option for rental property buyers because they tend to be more affordable than comparable to landed properties, and they are often located in desirable locations. Additionally, condos often have fewer maintenance demands because owners aren't responsible for taking care of the gardens or the building's exterior.
15. When to Hire a Property Manager
Rental property owners can manage the property themselves or hire a property manager. It can be a hard decision to make because property managers typically charge between 10% and 25% of collected rents, which can really eat into profits.
Still, hiring an experienced property manager can be well worth the cost. After all, it means less work and fewer headaches for you, as you take advantage of their industry expertise. In general, a property manager will:
Know how to market the property
Understand the local rental market and ensure you price the rental accordingly
Show the property to potential tenants (so you don't have to)
Screen tenants (for example, conduct credit checks and verify references)
Collect rent on your behalf and deposit the money into your bank account
Handle late rents and navigate the eviction process
Handle tenant complaints
Arrange maintenance and repair work
Pay property-related bills, such as quiet rent, utilities, and insurance
To decide if hiring a property manager makes financial sense for you, ask yourself these questions:
Do I have time to manage the property myself? If you have another full-time job, you likely won't have the time or energy to manage a property on your own. This is especially true if you own multiple properties.
How close is the rental property to my home? Being far away from the rental takes more time out of your day and makes it more difficult to manage routine and urgent issues.
Am I willing to deal with tenants? Even if you do a good job of screening, it's likely you'll have to deal with unreasonable tenants, late rents, and evictions at some point. Is that something you're willing to do?
Is my rental property for short-term (STR) or long-term (LTR) tenants? It might be easier to self-manage if you are looking for long-term renters. But if it's a short-term rental (for example, an Airbnb), you will be dealing with many different tenants—and potentially a lot of complaints and maintenance issues.
Do you need to be in control? If you will have a hard time handing over responsibilities such as choosing tenants and performing maintenance tasks, you may be better off managing the property yourself.
In every financial decision, you must determine if the payoff is worth the potential risks involved. Does investing in real estate make sense for you?
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