Whether you’ve saved up enough on your own or have found an amazing and reliable loan provider, buying an investment property can be an excellent choice. While owning an investment property and renting it out can be extremely lucrative and a great way to reap regular profits from a long-term investment, though, it is also pricey and not without risks. Depending on your financial situation, your tolerance for risk, and the personal and professional bandwidth that you have to spend on managing and maintaining a rental property, investing in an income property could either be a really good idea, or a bad one.
It’s vital to think about your flexibility and the diversity of your investments. You might have enough cash and income to acquire this rental property, but would doing so leave you with the cash you need for your emergency fund, long-term savings, and retirement accounts? Could you effectively be putting all of your eggs in one basket — a notoriously bad strategy when it comes to investing and business? In fact, you’ll need cash left over just to ensure that you can hang onto your property. What if you meet with an unexpected repair expense or a steeper tax assessment than you’d hoped? Without a strong emergency fund, you could be forced to let go of your real estate investment before you get started.
On the flip side, those with the capital to spare and the time to invest in managing a rental property will find few things are better bets for steady passive income and long-term value.
Maintenance is on you.
If you’re aiming to make the most of this opportunity, you’ll need to have a hands-on approach, as there will be a lot to maintain and upkeep. It’s crucial to keep your rental property in top shape. Doing so will better preserve its value, attract a higher-paying tenant, and will keep costly future deterioration at bay.
So be proactive. Prevent problems before they happen by running down seasonal maintenance lists and investing inspections and key improvements. Develop a good relationship with your tenants and respond promptly to their maintenance requests.
You’ll also have to periodically replace basic parts of the property, like windows and doors. When you’re ready to take such projects on, be sure to work with licensed and experienced professionals who will complete projects that are up-to-code and built to last.
Protect yourself and your property at all costs.
Maintenance will help protect your space from deterioration, better preserving the value of your property and better rewarding your investment. But make no mistake: Depreciation is far from the only risk that faces your property, your investment, and yourself.
You need to work with an attorney to set up your rental business legally, choosing the best method for protecting your financial and legal interests while reducing your dues at tax time. You should also invest in landlord insurance, which will cover the things that you can’t fully control, including fires, break-ins, and even lawsuits, depending on your coverage, of course. Be sure to read your entire policy and choose carefully.
Be wary of would-be tenants, too. Occupied properties deteriorate faster than unoccupied ones, but that difference pales in comparison to the difference between properties occupied by good tenants and bad ones. Bad tenants can be destructive, neglectful, and dirty. They may even turn your rental property into a non-performing asset by refusing to pay rent. Though eviction may be on your mind, this may be difficult to do, especially if you’re operating in an area with strong renters protections in the law. So choose wisely, and make full use of background and credit checks to screen tenants. Wait until you find a tenant you can rely on and trust with your property.
Taking out a loan for an investment property that you will rent out is a sound decision, but it should be approached strategically. Keep in mind that you will have to perform a lot of the upkeep yourself, and that you may face trouble finding reliable tenants. But once you do, you’ll realize that this is a great way to go about making a long-term investment.