Rental properties can make great investments that provide excellent returns year after year. On the other hand, being a landlord and a property owner isn’t for everyone. Before jumping into the rental property business, consider these three critical factors first.
#1. Reevaluate Your Finances
You’ve likely already taken a look at your income, savings, and investment portfolios to determine whether you can afford to purchase a property. However, there are more financial considerations after closing that could have a serious impact. In most cases, buying and maintaining a rental property is a long-term process. You’ll want to be sure that you’ve got enough in reserves to handle potential problems.
First, any property comes with a host of unexpected expenses, no matter how well it’s been inspected and repaired. From roofing incidents to an HVAC system failure, there are critical elements that won’t wait until you’re turning a profit to be addressed. Most landlords set aside at least five percent of the property’s value for these expenses. But it’s also important to be sure you can refill these reserves if you need to tap into them.
#2. Understand the Numbers
Owning a rental property is much like owning a business. While the numbers may be easier to compile on a single-family home than a multi-unit dwelling, there are still several figures to evaluate and get to ensure you’ll be earning a profit. For example, what is your projected income? What are all the income sources in addition to the rent (i.e., parking, storage units, laundry machines) as well as any expenses in addition to the basics (i.e., parking lot maintenance, storage security, machine maintenance)? What are you expecting in terms of return on your investment? While your finances are critical in the beginning stages after closing, you want to be sure that the property will be self-sustaining—and hopefully profitable—in the long run.
#3. Make Sure You Want to Be a Landlord
Being a landlord means being in control of a significant portion of someone else’s life: their home. While rental properties can be an excellent source of wealth creation and a passive income stream to an extent, it’s critical to understand that they also come with the people who will reside in your properties—and they are the ones that pay the rent that will make up your profit. That also means that rental properties come with the task of working with people and the ups and downs they experience in life.
For example, your tenants will be calling you at all hours of the night to report immediate problems such as plumbing backups, HVAC failures, or electrical issues and are likely to be in contact about a host of non-emergency repair issues throughout their tenancy. There is also the work of rent collection, tenant marketing and screening, and maintaining all areas of the building that tenants are not responsible for.
Bringing it All Together
In most cases, once the finances are worked out, the final obstacle can be overcome by engaging with a property management company that’s familiar with the area and has an excellent reputation for keeping both landlords and tenants happy. That way, you only need to worry about the most important issues; the day to day operations will be handled by a team that has the skills, experience, and temperament for the rental business.