Owning an investment property is often considered a win-win, easy-to-manage investment strategy for people who want to earn some passive income. But what many don’t realize is just how complicated owning a rental property can be. Owning a rental property is so much more than just finding a tenant and collecting rent.
If you're wanting to buy to rent, here are some tips from real estate and finance experts to help you buy an investment property and rent it out for a profit — the right way.
Know Your Purpose for Buying a Rental
Before you even start the hunt for a property to buy, take some time to think deeply about your “why” for buying a rental property.
According to Justine Chan, licensed real estate professional and founder of Live With Plum, “The biggest tip when deciding on an investment property is to weigh the risk versus the reward and knowing what the purpose of the property is.”
If you buy into a property without understanding your purpose for owning that property, you won’t be able to achieve your goals. For example, are you flipping the property first? Are you buying and holding onto it for awhile before renting? Are you renting it first and flipping later to sell? You can avoid accidentally turning your investment property into a money pit by understanding your why for purchasing and renting the property.
Assess the House Features for Value
Buying a home for yourself is a different game than investing in a property for rental. The features and perks that you may look for as an individual may not be what you want for a rental. “As an investor, look at each of those 'features' to determine the maintenance costs involved and whether they will help justify the added rent you’ll need to charge to cover them,” suggests Justin Poque, real estate investor and author of Rental Secrets.
While a pool might photograph nicely and appeal to people with children, it could also turn into a money sink for you as the property manager. An extra kitchen in the basement may get you excited, but it's double the appliances to fix and repair. Not all features are worth their cost. Yes, you can earn a little more in rent, but their upkeep may cost you a lot more than that little bit of extra.
Be Wary of Fixer-Uppers
We all love a good HGTV flip from trash to fab. But just like any other type of TV programming, the viewer misses a lot of what happens in the background. “If a property requires work of any kind, be sure to understand the details of what is required and permitted,” says Michael Shapot, Esq., Licensed Associate Real Estate Broker at The Shapot Team. For example, some cities may have restrictions around times of the year you can and can't renovate and may even impose a fee if renovations take longer than the permitted amount of time. Be sure to find out the legalities wherever you live.
In addition to the time-consuming work of meeting your city and state laws, you have to know how to hire and work with contractors. Brian Davis, founder of Spark Rental, says, “It takes time to learn how to screen and manage contractors, which is one of the most difficult parts of being a real estate investor. It also takes time to learn what you should expect to pay for different renovations and repairs, to learn the local permit process, to learn how to budget accurately for carrying costs, to stay on budget and on schedule and so forth.”
Consider It a Long-Term Investment
Kris Lippi, owner of ISoldMyHouse.com, says a big mistake that first-time rental property investors make is treating it like a short-term investment.
“You should have that perspective and not think of the property as a liquid asset that you can dispose of any time you need cash,” says Kris. “While you can surely do this, this is not a very good choice because you are looking at a huge loss there.”
Selling a rental property after a short period of time will give you access to a liquid asset, but it may be significantly less than what you started with due to fees. Buy your rental with a long-term view in mind.
Find the Right Real Estate Mentors
A little trick shared by Justin from Rental Secrets to find a good mentor is to work with a realtor who is also an investor. A realtor who is also an investor “will discuss your investment criteria with you and use that to guide their search. They will better understand the goals you have in mind.” The right realtor, especially a realtor who also invests in rental properties, will have a better understanding of what you need in a rental property.
Another way Justin shares to find mentors is to join a local investment club. “That will give you access to experienced investors who will happily share their knowledge and who know the right person at the permit office who can help solve whatever problems you might run into.”
Calculate for Ongoing, Non-Mortgage Costs
Most first-time investment property owners think they purchase a home, collect rent and pay the mortgage. Any rent they collect over the mortgage payment is profit. If only it were that simple. Your investment property will incur ongoing, non-mortgage costs.
“As a general rule, non-mortgage expenses tend to add up to around 50 percent of the rent each month,” says Brian from Spark Rental. “Non-mortgage expenses include vacancy rate, repairs and maintenance, property management costs, property taxes, insurance, along with legal, accounting, travel and other administrative costs.” He suggests using a free rental property calculator to run your exact numbers to understand cash flow and cash-on-cash return.
As an investment property owner, you’re also now operating a business. Kris from ISoldMyHouse.com suggests, “You should remember that the purchase price, taxes and closing costs are not the only things you’ll need to pay for. You are buying for business and so you should also expect to have some business expenses, including marketing, which is necessary to help you achieve your investment goals.”
Add a Security System
Kristen Bolig, security expert and founder of SecurityNerd, suggests adding a security system to your rental property. “Others are living in the home, but it's up to you to keep it safe — for your tenants and for your own financial purposes.” And a security system can be of extra value during those times when your property is between renters.
A security system can give you the peace of mind that your property is safe while also making your renters feel more secure. And for a bonus: you may receive a discount on your home insurance for having a system in place.
Know the Legal Basics
Purchasing, renting and updating a home all come with a set of legal regulations attached to them. Kris from ISoldMyHouse.com says, “There are laws governing businesses like rentals, including those that involve deposits, move-ins and tenant defaults. Make sure that you know the basics; better yet, consult a lawyer to make sure that you are not going to violate laws so you can save yourself the cost of possible litigation.” Owning a rental property is not the same as owning a primary residence.
Read All of Your Mortgage Documents
It’s tempting when presented with hundreds of pages of documents to sign at closing to simply add your signature without reading. But, if you do, you might miss something critical. “Don’t assume all the paperwork was prepared correctly,” says Justin from Rental Secrets. “Take your time and read through each document. And ignore the huge eye roll from the title people. They’re just focused on getting to lunch. Besides, they won’t be helping you with the mortgage or property management.”
He also hints that if you want plenty of time to read and understand the documents without being pressured, schedule your closing for the morning.
Build a Relationship with Renters
A key element of being a successful investment property owner is the tenants. Justin from Rental Secrets suggests, “Focus on maintaining great relationships with your renters. They are worth so much more than just the monthly rent check they provide. There are multiple benefits to a great landlord-renter relationship. They’ll take better care of the property. They’ll call you before small issues become big problems. And they’ll likely stay longer, which reduces your turnover costs and stress level.”
With experience comes great knowledge. Grab these expert tips before jumping into purchasing your first investment property to rent. There is so much that can go wrong, but with these tips in your repertoire, you’re less likely to make a mistake.
Page is a freelance content marketing writer with experience writing about small business, the future of the workplace and health. She also operates a weekly email newsletter where she shares advice on living an authentic, intentional life. When not writing, you can find Page traveling, fostering older cats and working as a sexual assault advocate.