Investing in a rental property can be a great way to make big profits. Many Americans are choosing to rent rather than buy, and that trend is showing few signs of slowing down. If you have the means, buying a rental property can allow you to profit from rent payments. At the same time, you’ll hold a valuable asset that—with a little cooperation from the real estate market—could grow in value over time. With real estate investments outperforming stocks at the moment, it seems like a great time to look at rental properties as investments.
But be careful: rental properties are not foolproof get-rich-quick schemes, nor are they easy maintenance-free projects. While investing in one can often be an excellent idea, a rental property is something that you should buy only if it’s a good fit for your personal and financial situation. Here are a few things to consider before investing in a rental property.
Do you have the financial flexibility to hang on in a tough market?
You’re a smart person, so you’ve presumably already figured out one thing: whether or not you can afford to buy a rental property. So let’s breeze past that and consider something slightly more complex: if you do buy it, what would it take for you to have to sell it?
Obviously, you’d consider selling a real estate property for the right price. But you also need to think about what it would take for you to have to liquidate your property at a lower price. Are your other investments large and liquid enough, and your emergency fund big enough, to allow you to hold onto your property even if we enter a bear market? Or would a rough economy leave you short on cash, forcing you to sell your investment property at the worst possible time?
Real estate is relatively illiquid. If you need your money in a pinch and have to rush to get it back, you’ll lose money on your investment and will, of course, lose the investment, too: you can’t sell half a building (at least, not usually)!
Think carefully about how steady your income is, what your credit score is (it will affect your mortgage interest rate, which will help determine your profits), and how much you can risk in real estate. Get your financial house in order, and make sure that you have the means to invest in real estate, and remember that this doesn’t just mean having enough to buy a property: it means having enough to buy a property and still have a safety net left over.
Do you have the time to manage a rental property?
Rental properties aren’t like stocks: you can’t just buy one and forget about it for a while. For your rental property to work for you, you’ll need to make sure it is maintained. You’ll need to pay taxes, advertise vacancies, sign tenants to leases, and keep up with a constant stream of maintenance and repair requests.
In other words, being a landlord is work! How much work it is will depend on how you structure your business. You can pay employees, contract work out to maintenance experts, and use landlord software free (at least something here is free!), all of which will cut down on the amount of work that you need to do yourself. But there will always be responsibilities, so you need to be realistic about the amount of time that you’re ready to commit to this money-making project!
Have you carefully researched your investment?
There are a few key questions to ask yourself before you consider getting into real estate at all, and we’ve talked a fair bit about them here. Once you’ve decided that you do want to invest in a rental property, you have still more to think about! You’ll have to look at the specific investment opportunity that you’re considering and really analyze the different aspects of it.
That means big-picture stuff, like how the real estate market is doing in the area and how many renters are around. It also means little details: the quality of the particular space you’re looking it, it’s age, applicable zoning laws and red tape, and so on. Be careful: without careful research and analysis, you could end up buying a property that needs lots of expensive work, or that is not equipped to compete in the local rental market. You should know your potential purchase through and through before you make a decision: how close is it to major roads, public transit options, work and education centers, and recreational attractions? How do the amenities stack up against competing rental stock? Get all of these details written down, and draw up a business plan that demonstrates a future return on investment (ROI) that you can believe in—or scrap that opportunity and keep looking for a better one.