Things to consider before Investing in a Rental Property

Real estate investing can provide numerous benefits.  Appreciation in price, cash flow from rents, tax shelters, and equity are just some of the benefits that come with investing in real estate.  For these reasons, many different people attempt to invest in real estate.  Some do good, some do great, and others do bad.  One of the most popular ways to invest in real estate is to purchase a property for rental purposes.

If you want to invest in real estate and have decided to rent out the properties you purchase, there are some things you should know before you dive into the real estate investing game.

First, and probably most important, you need to consider the tenant.  The tenant will be paying rent and will be living in the property you purchased.  If the tenant does not pay rent one month, you still have to pay your mortgage.  If the tenant destroys part of the property, there are legal remedies you can pursue, but in the meantime, you have to pay out of your pocket to make those repairs in order to rent the property to another person.

Although you cannot predict whether somebody will always pay on time or whether they will be model tenants, background checks, credit checks, employment verification, and references can all be utilized to limit the possibility of renting your property to a bad tenant.  As such, spend the extra money and use these resources before you rent your property to a tenant.

Second, rental properties can provide an excellent source of cash flow.  However, in order for you to be profitable on the property, you must consider every expense that accompanies the property.  Simply budgeting for the principal and interest payments of a mortgage is not sufficient.  You must also consider property taxes, home owners insurance, private mortgage insurance (if applicable), home owners association fees (if applicable), and any utility or other bill, such as trash and sewer, that you are going to pay.  If you have positive cash flow after factoring in all of these expenses, you are in good shape.

Finally, consider the property you purchase and the ability to rent the property.  Most rental properties are your bread and butter, 3 bedroom, 2 bathroom properties.  Buying some huge property with 7 bedrooms and 5 bathrooms, for example, may be harder to rent and may require a larger amount of rent in order to be profitable.  As such, although you may not always find a good rental property in the “perfect” neighborhood, expand your search area to include areas that may not be first on your search list.

Although you can obtain numerous benefits from investing in rental property, you must carefully scrutinize your potential tenant, you must factor in all expenses to determine your cash flow, and you may have to look outside your “perfect” neighborhoods in order to find a good rental property.