Are you thinking about buying a rental property? Investing in real estate can be satisfying and profitable. In particular, investing in a rental property can be a great way to produce passive income that can boost your bottom line each month. However, the key to success is finding the right rental property. If you choose one in a bad area or one that requires serious expenses, your rental investment could quickly become a money pit. Here are a few important things to consider when choosing your first property:
Keep room in your budget for the unexpected. Owning a rental property is just like owning any other home. You can be certain that repairs will arise on a regular basis. The difference with a rental property, though, is that you can't put off the repairs. If you have a tenant in the home, you have a legal obligation to maintain the property. That means that if the air conditioner goes out, you have to repair it, regardless of whether you can afford it. It's important that you don't max out your budget so you have money left over to make these unexpected repairs when they pop up.
Understand your worst case scenario. Too often, new investors look at the mortgage payment and look at the rent payment and simply count the difference as their profit. However, there are likely to be other expenses that you'll have to cover. You'll need insurance on the property. You'll likely have property taxes. You may need to pay homeowners' association fees. Depending on the area, renters may expect you to pick up some of the utility costs, like water, trash, or even gas and electricity. Know all your expenses to calculate your bottom line.
Also, determine how long you could carry all those expenses without a renter. What if the property sits empty for six months? Could you continue to pay the bills? The longer you can carry the property without a renter, the better off you'll be. You don't want to risk going into foreclosure if you're stuck without a renter for an extended period.
Investigate the location. Other than the condition of the property, the biggest influence on your success is probably the property's location. Take the time to investigate the area to determine whether the property will be in demand. What's the crime level like? Do you see graffiti and property damage on surrounding buildings? Are there essential businesses like grocery stores, restaurants, and pharmacies nearby? Ideally, you want a neighborhood that has a long history of strong rental demand or an area that's on the upswing. Also, college towns and beach communities tend to have constant rental demand, so those may be great areas to consider.
Talk to a real estate agent from a firm like Charles L Moles Real Estate Services that has experience working with investors. He or she can show you properties that meet your needs, goals, and budget.