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Advantages and Benefits of Buying Rental Properties - Residential Investment Real Estate - Grow your Personal Equity

Updated on May 19, 2012

Choose the Right Rental House and Become a Landlord

With home prices at record lows and a strong rental market, you might have been tossing around the idea of buying some investment property and becoming a landlord. But where do you start? What type of property is right for you? Here are some tips that might be helpful as you mull over your options.

  1. Would you live there? If you've started doing a little looking around, you no doubt have seen some pretty ugly places and you've seen some well maintained properties. Is the house (or duplex or apartment) a place where you would live? Would you feel comfortable if a family member lived there, like, say, your daughter in college? If the location or home itself seems unsafe or falling down around your ears, you might be best served to just walk away - no matter how good the deal seems right now. If you can imagine yourself (or your younger self) living there, then it might be worthy of consideration.
  2. Do you have DIY skills? Whatever house you may be looking at will need some level of repair and maintenance - either before you put it on the rental market or as tenants are living in it. Some of the best deals in the current housing market need some work. Maybe the house wasn't kept current with repairs. Maybe the decor is circa 1963 - and not in a good way. Can you make it attractive to potential renters? Do you have contacts who can do the work for you - at a price you can afford? Don't just look at the deal as it stands today - keep in mind any upgrades or repairs that are needed now and in the future.
  3. Is it priced below the market? Based on the level of work needed, is the house a good deal? Remember that you want to make money as it is rented but also when it comes time to sell. Can you cover the price of the house plus expenses to upgrade/repair and still make a profit down the road? There are different considerations that need to be taken into account when purchasing a property as an investment versus purchasing a property as your primary residence. There are a lot of emotional considerations in your own property. Most of the decisions in an investment property need to be factual, with a lot of arithmetic involved.
  4. Will rent cover your expenses? Do your homework on what the market will bear relative to rents. Pretend you're looking for a rental property for yourself with the characteristics your house will have. What is your competition offering for comparable features? If someone is considering your property, would they pay more a month (they might for certain features - a fenced yard, updated kitchen, pet friendly, etc.)? Know what's going on in the market to know what rents you can reasonably charge for the property. Once that is decided, would you be able to cover your mortgage (if you need to finance the property) and things like insurance, property taxes, no tenants for a couple of months, repairs? Put pencil to paper and assume the worst case scenario to find out if the numbers make sense. Be conservative so that there are no surprises down the road.
  5. What does the rental market look like? Do your homework and make sure that the market you are considering isn't overly saturated with rentals. What is the occupancy rate where you are? In the country as a whole, the rental market is fairly strong, just make sure there aren't a lot of unoccupied rental properties currently on the market.
  6. Will you be able to sell? Here's where the investment part comes in. You want to make a little each month on the rental (and there are also some good tax benefits to owning investment properties) but you really want to be able to recoup your money in the long run. Take a look at the location of the property. Is the home likely to appreciate over time? Is it in a stable town or neighborhood that is experiencing growth? I know those are hard questions to answer these days but purchasing investment property needs to be done with an eye to the future. Even if you plan to hold on to the property for 20 years, you may find yourself in need of funds in, say, 3 years, and you want to be able to get out from under it if needed.

Owning rental property can be a great experience and a lucrative venture. But the more due diligence and legwork done on the front end will make for a smooth experience and seamless transition when the time comes to sell. Good luck and happy renting!!


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