Buying rental property can seem like a lucrative venture. When it comes down to it, it requires more than simply buying a house and throwing up a "For Rent" sign. Owning rental property can make you money, but it can also help you lose your money if you don't do it the proper way.
Before you decide to become a landlord, take these factors into consideration. Each one can help you create a plan for buying the right rental property. Proper planning can also help to ensure that you are ready to be a landlord and can turn a profit on your property.
Location Is Everything
Consider the location where you are buying very carefully. Conduct research on the neighborhood and surrounding areas as you would if you were considering living there yourself. Find out about the crime rates. Review the schools and their ratings. Take a look at the types of residents that live in the area-young professionals, families, senior citizens or college students, for example.
Websites, such as Zillow.com, are handy research tools to use. Click on the Local Information Link at the top of the page. Type in the address of the property or a city, state and/or zip code for the area. Zillow provides information on the values of homes, school ratings and the demographics of the population in the area.
Some neighborhoods tend to bring in higher rent amounts than others. For example, an area that caters to families with some of the top-rated schools in the state can earn you higher rent amounts than neighborhoods with less-than par schools.
Pay the Right Price
Great deals get picked up quickly, so be ready to look at, assess and make an offer on a property as soon as possible. The obvious step is to pay as little as possible for the property, but it is also important to consider the potential increase in the value of the property while you own it. Being able to charge enough money in rent to cover the mortgage, taxes and insurance on the property is also a consideration before calculating the purchase price.
If a home is priced far below its market value or the appraised value of the property, then you know you are getting a good deal--as long as repairs are non-existent or not extensive. A home inspection is a necessity to figure out the condition of the property before you invest your hard-earned money into purchasing the home.
Rental properties are riskier properties to lenders than a home where you are going to live yourself. This means that lenders tend to require a higher down payment on a rental property so they can reduce their amount of risk by lowering the financing amount they give you. Since you face a larger down payment than you would have to pay on a primary residence, consider this when looking at properties.
According to Investopedia, you typically have to put down 20 to 40 percent of the purchase price as a down payment. The higher the purchase price you are considering, the higher the down payment you are going to have to provide.
Have a Property Inspection
A property can look great on the outside (and even on the inside) but there might be hidden repairs or problems. Ensure you have a professional inspector inspect the property before you buy it. An inspector can help to point out repairs that need to be made or problems that exist, all in an effort to help you avoid unexpected expenses. Unexpected expenses eat away at your cash savings and profit from a rental.
The Right Insurance
As a landlord, you are responsible for carrying specific types of insurance on the property. According to Bankrate, there are three different levels of policies that landlords have to consider: DP-1, DP-2 and DP-3.
- DP-1 is basic coverage that covers the property in case of vandalism or peril, such as a fire.
- DP-2 insurance policies up the ante, covering perils that include windstorm, hail, fire or vandalism.
- DP-3 policies are the most comprehensive. This covers any type of peril, unless the policy specifically excludes it.
Of course, the more comprehensive the policy is, the higher the insurance premiums tend to be. In the long run, though, comprehensive coverage can save you thousands of dollars in repairs to the home in case of damage.
Liability insurance is a must for landlords. It protects you in case of injury to a tenant or a tenant's visitor while they are in your rental unit. Bankrate suggests a minimum of $1 million of liability coverage for a rental home.
Cash for Expenses
When you're renting out a property, "saving for a rainy day" has a whole new meaning. If you are making a profit on the monthly rental, consider putting this money into a savings account. This can help pay for or offset your expenses when repairs are necessary.
Experts vary in opinions on how much money you should have put away as a landlord, but think in terms of having to replace a heating or cooling unit. This can cost you thousands of dollars, so the more you can sock away in case of an unexpected expense, the better off you are.
Being a landlord doesn't necessarily mean you are going to quickly become wealthy. If you take these tips to heart, however, you can turn enough of a profit to make it worth your time and efforts.