Rental properties are becoming more common as a secure investment. If you do a quick internet search about properties’ values, you will see that in most cases the value appreciates over the years so even if you don’t always have tenants to stay at your property, you can still make a good profit with this strategy as a long-term investment.
Like any investment though, there are risks. You will have to make sure that you can secure the safety of your hard-earned money. To do this there are a couple of factors you should consider before buying a property.
Let’s look at the do’s and don’ts to consider before investing in a rental property.
The Do’s of Investing in Rental Properties:
1. Get Knowledgeable About Property Investing
A lot of people make passion-driven investments just to find out that it doesn’t suit them. You should look at many factors like the structure of the home, the perceived value, and the condition.
Let’s look at what you could do:
- Unless you’re a whizz at refurbishing properties you should look for modern builds with updated amenities so that the property is ready to rent as soon as you buy. The kitchen, for example, is usually a big seller and should be in top-notch condition.
- If you do need to refurbish the property, for example, if there aren’t any cabinets, sinks, or doors installed you will have to find a cost-effective manufacturer to give it mass appeal.
- Find out what materials the house is built from since some materials and less durable than others.
- Don’t overpay. Get a professional opinion on the house price and compare it to other similar listings in the area. Additionally, it’s well worth running the numbers to determine the maximum amount you can pay while still achieving your cash flow goals.
- Make sure that the owner’s documents are all in order and compliant with all laws.
It’s a good idea to have someone knowledgable about construction inspect the building before finalising any paperwork to ensure the building is sound and isn’t going to cost you money down the line.
Agents make sure of most of these things for you, so if you’re not entirely confident you might want to consider work through an agent.
2. Take on Partners
Having a partner means you can share the expenses and management responsibilities which will take some of the pressure off. Although the profits will have to be shared, the risk will also be shared which makes it much easier to invest if you’re a newbie to buying property. Things to make sure about if you decide to go this route will be:
- You will likely want to place the property under an LLC with joint ownership.
- Get a lawyer to draw up all relevant legal documents.
- If you are buying a greater percentage of the house, then make sure you get more say in matters that might occur.
- Make sure the partner is someone who you not only trust but who has a good head for business and properties. Your partner should be agreeable as well as someone who has contacts and industry knowledge.
3. Make Sure You Choose the Right Location
Location is everything. You will have to make sure about a couple of things regarding the location you choose:
- Make sure that the risk of natural disasters in that area is not high.
- Make sure that the city or town you chose has a low crime and unemployment rate.
- Look at the history of property values in the area to get an idea of the properties potential long-term appreciation.
- Make sure that there aren’t any projects that will be implemented near the property that might be a risk to your investment. For example, if their opening an airport nearby this would likely decrease the value of the property. On the flip side, new projects like improved public transport or new schools will increase the properties value.
- It’s also good to research the demand for rentals in the area.
- Determine the average rent amounts being charged by like properties in the area.
Rental Property Investing Don’ts:
Even if you are intending to rent the property make sure that you’re able to at least pay the properties expenses for six to nine months. This should cover any unexpected maintenance costs and prolonged vacancies. Additionally, you must make sure to set a reasonable rent amount. Charge too little and you won’t be able to cover all the costs associated with the property as well as generate positive cash flow. Charge too much and you will put off prospective tenants and could see extended and costly vacancies as tenants choose more affordable options.
2. Never Buy A Property “As Is”
Always inspect the property before your buy. It might seem like a great deal, but underneath those walls could be a costly horror show that you might not be prepared for. If you are willing to buy a fixer-upper make sure you know what you’re getting yourself into and which repairs you have to work on!
3. Don’t Rely Too Much on Agents
Like I previously mentioned, agents are great! The only thing is they are also out to get money and it’s not 100% guaranteed that your agent did all the research on the property as they are just humans and can make mistakes. That’s why you should rely on a combination of the agent’s research as well as your own.
Rental property investing can be risky if you don’t do it correctly. Try to gather as much information as possible on the best locations for investments, use key investor metrics to judge the potential of a property as a rental, and make sure you have cost-effective solutions for outfitting and maintaining your property.
Investing in properties is great, you can generate cash flow while simultaneously building wealth in an appreciating asset. However, you need to make sure you have the knowledge to choose good properties that will cash flow and have the tools to accurately set and track your budget to maximise your rental property businesses profitability.