Things to Know Before Buying a Rental Property
Rental properties provide at least two advantages when you’re looking to invest in real estate. It can provide monthly income when your tenants pay the rent and when you sell the property, you can recoup your original cost and gain additional profit because of appreciation. However, this type of financial investment is not without its risks. If you want to be successful with this type of real estate, check out these useful tips.
Real Estate Appreciation
As other owners and investors start buying properties in your area, real estate becomes scarcer which makes its price go up. So if you picked the right location and depending on how long you hold onto it, your property increases in value when you sell. You should get back your original cost, your annual expenses plus a profitable return. Investing for appreciation is riskier than investing for cash flow. However, the longer you hold on to your investment, the more likely that the appreciation will be greater.
The money you pay for your property will be the first of your expenses, most of which are due monthly or annually. They include interest payments, regular maintenance such as gardening, property taxes, insurance, the cost of securing tenants, and the fees to a property manager. The money you receive from your tenant should be greater than all these expenses and include a little bit of profit, that way you gain positive cash flow.
The biggest risk is that you won’t make enough money to cover all your expenses and that you go into increasing debt for every month that you own the property. Your rental might lose value if you purchased in an area that is becoming less desirable. You may also have unexpected repairs such as a busted window or roof damage during a storm. Make sure that your rent costs are high enough to create a contingency fund to take care of such unforeseen expenses. Of course, your biggest risk is people — tenants who do not pay the rent on time if at all or leave your rental in worse shape than they started with. Hiring a property manager who knows how to screen renters can avoid this problem.
If you do enough screening, your tenants may take excellent care of your property and even become your friends. They may remain at your rental trouble-free for many years. However, the biggest reward to becoming a landlord is gaining enough positive cash flow to supplement your regular income, so your property becomes a good investment. If you invest in enough rewarding rentals, you may end up with enough profit at the end of each month so you will not have to work at a full-time job again while increasing your net worth.
When you’re ready to buy an investment property and need a professional to take care of it, please contact us at Aria Properties.